INSURANCE AND THE STATE 



THE MACMILLAN COMPANY 

NEW YORK • BOSTON • CHICAGO • DALLAS 
ATLANTA • SAN FRANCISCO 

MACMILLAN & CO., Limited 

LONDON • BOMBAY • CALCUTTA 
MELBOURNE 

THE MACMILLAN CO. OF CANADA, Ltd. 

TORONTO 



INSURANCE AND THE 
STATE 



BY 



W. F. GEPHART, Ph.D. 

PROFESSOR OF ECONOMICS, WASHINGTON UNIVERSITY 
AUTHOR OF "PRINCIPLES OF INSURANCE" 



THE MACMILLAN COMPANY 

1913 

All rights reserved 



H <*TM\\ 



COPYBIGHT, 1913, 

By THE MACMILLAN COMPANY. 

Set up and electrotyped. Published September, 1913. 



NottoooU $KS8 

J. 3. Cushing Co. — Berwick & Smith Co. 

Norwood, Mass., U.S.A. 



.Cl'.A354i00 



PREFACE 

No more interesting aspect of the public's atti- 
tude towards insurance has developed than the 
opinion which is beginning to be expressed in 
many quarters that the business should be made 
a public monopoly. It is difficult to explain fully 
the origin of this opinion. Perhaps it has its ori- 
gin in part in the belief by some that the prac- 
tices of some companies and officials prove that 
individuals have forfeited the right to conduct in- 
surance as a private business. This may assume 
that those holding this view have such an under- 
standing of insurance that they perceive its enor- 
mous social possibilities and conclude that the 
possible social uses of it are such that private 
interests must give way to what they conceive to 
be a larger public interest. On the other hand, 
the opinion may be a result of the conviction 
which many have come to have that the state 
should be intrusted with any activity which af- 
fects large numbers of its citizens. This assumes 
a faith in the efficiency and integrity of public 
officials which many do not yet hold. 

[v] 



PREFACE 

The author hopes that his practical experience 
in the business land his teaching of the subject 
have made it possible for him to appreciate the 
arguments of the opposing parties to the contro- 
versy. This brief discussion is modestly offered 
in the hope, therefore, that it may be of some 
value in modifying the extreme views on each 
side and aiding others in reaching a rational con- 
clusion. If the discussion has any value, it must 
be because of the questions which it raises and 
not of those which it answers. 

No effort has been made to write a brief either 
for or against a state monopoly of insurance. 
Many of the statements will doubtless seem ab- 
surd to one or the other class of extremists, but 
it is hoped that there is a large class who are 
open minded and will find something in the dis- 
cussion to aid them in arriving at a rational con- 
clusion. 

Insurance as a subject for formal study and 
writing has received surprisingly little attention 
in the United States, notwithstanding the fact 
that it has had in this country a wonderful devel- 
opment and has been a subject for frequent legis- 
lation and investigation in the numerous states. 

Practically no one except those interested in 
[vi] 



PREFACE 

selling insurance and managing the companies 
has given the business the study which its impor- 
tance demands. This condition has been unfor- 
tunate both for the public and the insurance 
business. Those connected with the companies 
came to have in many instances little respect for 
the public's knowledge of insurance and some- 
times little consideration for the public interest 
involved in the conduct of the business. Prac- 
tices in the formation and operation of companies 
were thus made possible which have injured the 
insurance business, partly because of the practices 
themselves and partly because of unwisely enacted 
laws. As the public became interested in the 
methods of business conduct, attention was di- 
rected to the insurance business with the idea of 
instituting certain reforms. Yet when the public 
endeavored to apply the reform ideas to this busi- 
ness, it was found that few legislators had the 
knowledge which was necessary to direct construc- 
tive reform legislation. Insurance in its funda- 
mental aspects is not like other business in that 
it is not one for great private profit. Yet as it 
had been practiced in many instances it had be- 
come of this character, and hence many legislators 
classed it with the ordinary private business. It 

Fviil 



PREFACE 

seemed to the legislator a proper source of revenue 
for the treasury, a business to be placed under the 
anti-trust laws and a business to be discriminated 
against in one state when it was organized in an- 
other state. The insurance class was distrusted 
as a source of information upon which to base 
legislation. The result has been that legislation 
has sometimes been enacted from which the busi- 
ness and ultimately the public have suffered. 

It is hoped that the reader will find in these 
pages a fair discussion of the diverse views of 
legislators and the insurance fraternity and that 
some light may be thrown on the question of the 
proper relation of the state to the insurance busi- 
ness. In our present day zeal for state direction 
of activities formerly of a private nature, our con- 
fidence in the state as an agent may precipitate 
us into lines of action before adequate study and 
preparation have been made. Success in collec- 
tive action as in individual action cannot be pre- 
dicted upon following prescribed rules of procedure 
which are good for all times and for all peoples. 

The data for the statistical tables and calcula- 
tions have been taken from the Spectator's Annuals, 
State Insurance Reports, the United States Census, 
and Brown's Book of Life Insurance Economics. 

[ viii 1 



PREFACE 

The first named reference has been of especial 
value. Caution has usually been given against 
making the statistics prove too much. Insur- 
ance statistics are peculiarly susceptible of being 
strained to prove a point. 

W. F. GEPHART. 

Ohio State University, 
March 1, 1913. 



IX] 



TABLE OF CONTENTS 

CHAPTER I 

PAGE 

The Chaeacter of Insurance and Its Legal Status . 1 

Insurance a subject of state and not federal control — 
The differences in insurance legislation in different states 

— Effect of this difference on the development of insurance 

— The general character of insurance as a business — The 
absence of great risk — What is the function of the state ? — 
Is insurance a suitable business for conduct by the state ? 

CHAPTER II 

State Insurance in Practice 14 

The Italian monopoly of life insurance — The monopoly 
of sickness and accident insurance in Switzerland — Other 
examples in European countries of state insurance — The 
Wisconsin plan of State Life Insurance. The Massachu- 
setts plan of Savings Bank Insurance — The Ohio mo- 
nopoly of Industrial Accident Insurance. 

CHAPTER III 

Should the State Monopolize Life Insurance? . . 30 

Purposes assigned — (1) as a source of revenue ; (2) for 
social developmental purposes ; (3) as a complete method 
of regulation — Possible sources of revenue for the state — 
The problems of state financiering involved — The social 

[si] 



TABLE OF CONTENTS 

PAGE 

significance of insurance under a state monopoly — Could 
the state apply the insurance principle more widely ? — Can 
insurance costs be reduced ? — Is insurance subject to the 
law of decreasing cost ? — To what extent has private in- 
surance insured the insurable ? — Would the state popular- 
ize insurance ? — Would the cost be less ? — The power of 
the state to regulate insurance — The absence of monopoly 
in the insurance business — The problem of politics under 
state insurance — Should private companies be indemnified 
if the state assumes the business ? 



CHAPTER IV 

The Nature of Fire Insurance 83 

Fire and life insurance compared — The fire insurance 
contract, a pure contract of indemnity — Fire insurance is 
not a tax — The risk in fire insurance — Conflagrations — 
The character of fire insurance assets — The limitations on 
the principle of mutuality in fire insurance. 

CHAPTER V 

Should the State Monopolize Fire Insurance? . . 101 

Purposes: (1) as a source of revenue; (2) as a method 
of regulation ; (3) for social purposes — The profits of fire 
insurance companies — Sources of the profit — Underwrit- 
ing and investment profits — The character of the expense 

— Is there any evidence of a monopoly ? — The difficulty 
in establishing a successful fire insurance company — Are 
rates unduly high, discriminatory or inequitable ? — How 
rates are determined — Difficulties in state fire insurance 

— The fire loss in the United States, and in Europe — 
Attitude of the companies towards the fire loss — The 
effects of valued policy and anti-compact laws. 

[xii] 



TABLE OF CONTENTS 



CHAPTER VI 

PAGE 

The Nature of Social Insurance . . . . 157 

Definition of social insurance — How the need for such 
insurance arose — The relation of the state to such insur- 
ance — The development of the theory of employer's lia- 
bility — Liability insurance in the United States — Legal 
and popular restrictions to its development — Present in- 
terest in plans of protecting the wage earner. 

CHAPTER VII 

Should the State Monopolize Social Insurance? . . 174 
Methods used to protect workmen against the result 
of industrial accidents — The results of private liability 
insurance in the United States — The liability and the 
compensation principle distinguished — The reasons for 
compensation — Reasons assigned for a state monopoly 
of compensation insurance — Can the cost be shifted to 
the consumer ? — Could equally good results be secured 
by private companies selling compensation insurance ? — 
The difficulties of state compensation insurance in the 
United States. 

CHAPTER VIII 

The Relation of the State to Sickness, Old Age, and 

Unemployment Insurance 208 

The social significance of sickness — Sickness insurance 
as a state monopoly distinguished from the monopoly of 
industrial accident insurance — Who should bear the cost ? 
Methods of providing old-age insurance — Should the state 
supply such insurance ? — Is the insurance principle appli- 
cable to unemployment ? — Causes of unemployment — 
The general benefit and social significance of social in- 
surance. 



[xiii 



INSURANCE AND THE STATE 

private individuals. Everywhere in the United 
States, with certain minor exceptions to be dis- 
cussed later, the business of insurance is under 
private control. It is also a business subject to 
the control of the various states of the Union, 
since the Supreme Court of the United States has 
decided in a very definite manner that it is neither 
interstate commerce nor an instrumentality of 
commerce. Hence it is not under the control of 
Congress; at least it does not fall under that 
section of the Constitution which gives to Con- 
gress extensive powers of controlling interstate 
and foreign commerce. 

Although the federal government may exercise 
some power over insurance by an exercise of the 
taxation power, yet this power is concurrent with 
a similar power of the states, and the larger powers 
of regulation are limited by the decisions of the 
federal supreme court. It therefore appears that 
the subject of insurance will continue to be one 
over which the states will exercise major control. 
An examination of the present statutes in force 
in the various states on the subject of insurance 
discloses great variation in the laws. Some de- 
sirable uniformity has been accomplished within 
the past decade, but lack of uniformity is the 

[2] 



INSURANCE AND THE STATE 



CHAPTER I 

THE CHARACTER OF INSURANCE AND 
ITS LEGAL STATUS 

ALL human progress which is essentially an 
increase in social well-being has arisen from 
some improved method of cooperation, whether 
this new form of cooperation has resulted from 
private initiative or from public compulsion in 
obedience to enacted law. There is probably 
no other form of cooperation which is so funda- 
mentally valuable to the cooperative members, 
indiscriminately, rather than to particular mem- 
bers, than insurance. In insurance is found every 
essence of cooperation. It is therefore proposed 
to examine the character and status of insurance 
as a business, upon what may be called the eve 
of the experiment of directing this form of coopera- 
tion by the state rather than by the initiative of 

[i] 



THE CHARACTER OF INSURANCE 

chief characteristic of state laws affecting insur- 
ance. This condition gives no promise of change. 
The business is essentially interstate; that is to 
state, the greater percentage by far of insurance 
in force on the books of the companies is com- 
posed of policies from more than one state. Yet 
the legislature of each state persists in treating 
the business as a purely state business. Most of 
the legislatures attempt to favor, as they imagine, 
home companies, notwithstanding the fact that it 
is usually the practice of a home company only 
to confine its business to the state until it gets 
under way as a going concern. It is true that the 
small local mutual companies restrict the terri- 
tory of operation, but every important life and 
property insurance company in the United States 
does business in other than the state of its incor- 
poration. This confusing, burdensome, and in- 
equitable legislation takes various forms. It may 
be and is generally true in the case of the taxes 
levied on insurance. One state may levy 1| per 
cent on gross premium receipts collected in the 
state, another 2 per cent on the same, and still 
another 1 per cent on the net premium receipts. 
One state may lay down in great detail provisions 
regarding the formation of a company and the 

[3] 



INSURANCE AND THE STATE 

sale of its stock, while another state may have few 
provisions in its laws regarding the subject. One 
state may attempt "to keep money in its borders" 
by requiring a large percentage of the premiums 
received in the state to be locally invested, while 
another may permit the fullest liberty of invest- 
ment, not only as to the principal sums collected, 
but also as to the kind of securities in which the 
sums may be invested. 

The development of insurance, not only as to 
the increase in the numbers of policyholders of 
the ordinary kinds of insurance, but also as to 
new applications of the insurance principle, that 
is, new kinds of insurance, has been greatly hin- 
dered by this burden of confusing legislation. It 
has added enormously to the cost of insurance to 
the policyholders, and it has made adjustments 
to new conditions difficult. New forms of in- 
surance have slowly arisen in the United States 
as compared with the European countries, but 
it is not due chiefly to the fact that the insurance 
officials have been less inventive or skillful. The 
wonderful accomplishments which have been 
secured in the old established lines of insurance 
give some idea of what might have been secured 
if the business had not been hampered by restric- 

[4] 



THE CHARACTER OF INSURANCE 

tive and confusing state legislation. As it is, 
voluntary insurance in America far exceeds in 
number of policies and volume of insurance all 
that of the remainder of the world. 

Before the problem of state insurance is con- 
sidered in detail it will be well to examine the 
character of insurance as a business. Does its 
administration present difficult problems ? Is 
it a business fraught with great public or social 
importance ? Insurance, as has been stated, is a 
method of cooperation. It is the joining together 
of a number of individuals necessarily exposed to 
a risk for the purpose of collectively assuming 
and therefore distributing a risk otherwise borne 
by the individual. The total risk assumed under 
insurance is less than the sum of the individual 
risks borne previous to the application of the in- 
surance principle. This is true because a larger 
degree of certainty is exchanged for uncertainty, 
inasmuch as the benefit of the law of average is 
secured. The application of the insurance prin- 
ciple presents no great difficulties. That is to 
say, in most forms of insurance the basis upon 
which the operation is made is well understood. 
The principles have been established from the 
study of data and experience. Insurance is, in 

[5] 



INSURANCE AND THE STATE 

other words, in most branches thoroughly scien- 
tific. There is no great risk to be assumed by the 
organizers. In life insurance the ^mortality sta- 
tistics are, as a whole, sufficiently accurate to assure 
that the insurance given under them carries no 
risk to the insurer. In fire insurance the burning 
rate is fairly well known. In other kinds of in- 
surance the data may not be either as complete 
or as accurate, but few inherent difficulties will 
be found in placing in operation the insurance 
principle. Insurance is, in other words, a safe 
business. It is not complex. It is relatively 
simple so far as the fundamental principles upon 
which it is based are concerned. Problems in- 
deed do arise in the administration of the business ; 
such, for example, as the investment of the funds 
advantageously and safely, and the equitable 
determination of charges as regards different in- 
dividuals, but these facts do not disprove the 
original statement that the principles underlying 
the business are well understood and that it is 
relatively easy to place them in operation. There- 
fore for the state to assume the business of insur- 
ance would not involve its entering upon new, 
untried, and dangerous grounds. Is it a business 
fraught with social import ? If insurance is a 

F61 



THE CHARACTER OF INSURANCE 

method of assuming and distributing necessary 
risks, it must have great social importance. If 
death, sickness, accidents, and destruction of 
property are risks to which every one in some form 
is subjected, then any means whereby the risks 
are reduced must have great social value. It is 
urged by some that such is the social value of the 
utilization of the insurance principle that the 
members of society should not be permitted to 
decide voluntarily whether or no they shall avail 
themselves of the principle, but should be forced 
to do so. It is undoubtedly true that no one can 
escape the risk, and no means of reducing the risk 
is known, other than that of using the insurance 
principle. However true this may be, it does not 
follow as a consequence that the state should 
necessarily assume this business. 

At this point arises the unanswerable question 
of what should be the function of the state. Upon 
what principles shall the sphere of state activity 
be decided ? The once generally accepted prin- 
ciple, that the state should not do for an individual 
or group of individuals what they could equally 
as well do for themselves, gives us no great aid in 
deciding the question. With the increasing devel- 
opment of democratic ideas the state has come to 

[7] 



INSURANCE AND THE STATE 

be considered an organ for the expression, protec- 
tion, and development of social needs as distin- 
guished from individual or group interests. Nor 
is the state to be solely an organ for serving the 
present generation, but it is more and more to 
be used to prepare the way for the future genera- 
tions. It is maintained that the social well-being 
to be furthered by the state is therefore something 
more than the sum total of the individual well- 
being of the present living, and that even if the 
present well-being alone is considered, a unified 
activity of the state brings greater benefit to all 
than the same activity diversified by remaining 
under the control of private individuals. 

New fields of state activity are continually 
being found with that increased complexity of 
society which calls for the nicer and nicer adjust- 
ment of one's conduct towards his fellows which 
can only be secured under the single directing 
and unifying organ of society — the state. The 
fact that in the United States there are many ob- 
stacles to this increased activity of the state, such 
as constitutions, need cause no great concern. 
Such obstacles must be trivial and temporary 
when a long, distinct vision of society is taken. 
Already the people are forming the habit of amend- 

[81 



THE CHARACTER OF INSURANCE 

ing and revising constitutions or adopting entirely 
new ones in the states, and as they more and more 
realize their sovereignty they will fashion their 
tools, like any good workman, to do the work 
which they wish them to do. So far, then, as they 
realize that a constitution and the laws which are 
made under it are but expressions of the will of 
the people, so far will they change their past ex- 
pressions to suit present ideas. Constitutions and 
laws therefore present but temporary obstacles 
to the assumption or even monopolization of the 
insurance business by the state. 

It may now be inquired if the business of in- 
surance is of a kind which is suitable for a source 
of private gain ; that is to state, is it a business 
from which individuals should be permitted to 
take profit in the technical sense of the word ? 
Or is it a business of such social importance that 
its costs to those whom it serves should be prime 
costs ? That is, should the outlay for the service 
be limited to wages for those who are employed 
to conduct the business of insurance ? Even con- 
ceding a monopoly of this business by the state, 
it would probably not mean a great reduction in 
the number of wage earners who are now employed 
in the business. But it certainly would mean 

[91 



INSURANCE AND THE STATE 

that the business of insurance would afford no 
opportunity to the capitalist for the employment 
of capital and but a very limited opportunity 
for the landowner to secure rent, because insur- 
ance under government operation would be purely 
mutual insurance, or if it should be administered 
on a basis for profit, the surplus would go to the 
state treasury. 

Whether it is or is not a suitable business for 
profit must be determined largely by two con- 
siderations. First, to what extent is the indi- 
vidual free to- deal in the commodity or service? 
Second, to what degree is the element of risk pres- 
ent whereby unusual skill, foresight, and great 
ability are under our present economic system 
supposed to justify one in taking or receiving a 
large return in the nature of a profit, risk interest, 
wages of management, or whatever we are pleased 
to call this unusual fund ? 

As to the first point, we have but to consider 
again the nature of insurance. It is but a method 
of assuming and distributing necessary risks to 
which every one is in some manner exposed. The 
fact that many do not avail themselves of the in- 
surance principle does not prove that they are 
essentially free to choose. Indeed they have 

[101 



THE CHARACTER OF INSURANCE 

chosen. The risk remains whether or not they 
choose to admit its existence. Their failure to 
reduce the risk by joining with their fellows in 
applying the insurance principle means that their 
social mind lacks development, and it means 
further that their fellows ultimately bear a large 
part of the risk. The loss of a life is usually a loss 
to society, not only because of the potential value 
of the life itself, but also because of the withdrawal 
of protection from those dependent upon that 
life for support and preparation for efficient 
living. The loss of a property falls immediately 
upon the owner, but it is also a destruction of so 
much social capital. The loss of time by sickness 
or accidents means that so much less of the work 
of the world is done, or perchance it is shunted 
upon shoulders already heavy with work. The 
individual ought not to be free to choose whether 
he shall increase social well-being by using the 
insurance principle, even though it be true that 
insurance per se gives but a very indirect benefit 
to the individual. Its first and fundamental 
characteristic is mutuality; the principle of each 
for all and all for each. If, then, the idea of profit 
to the insured is excluded by the very nature of 
insurance, and if it is a method of reducing nec- 

[111 



INSURANCE AND THE STATE 

essary risks and if the value resulting is distinctly 
a social value, should individuals be permitted to 
receive a profit from administering it ? Paradoxi- 
cal as it may appear, it is the insurance officials 
who unconsciously argue for this view. This is 
most clearly shown in the taxation laws of the 
various states. The greater number of insurance 
officials, especially those connected with the life 
insurance companies, oppose the taxation of in- 
surance on the ground that its character does not 
justify the tax. It is called by them a "tax on 
thrift," yet the legislators make insurance a 
source of considerable revenue for the state. 

As to the second point, vis. whether there is 
such a risk present in conducting the business as 
would justify the taking of a profit. This question 
has been answered in part by the consideration 
of the basis or principles upon which the busi- 
ness is conducted. These principles have been 
in most kinds of insurance long known and well 
understood. The results of many years' appli- 
cation of the principles are known. The data 
are available, and in most cases are organized or 
capable of being organized, so that no great ele- 
ment of risk is present. This is not to state 
that perfection has been reached in applying these 

[12] 



THE CHARACTER OF INSURANCE 

data, but certainly with our present knowledge 
there is no excuse for dangerous experiments. 
Mortality and morbidity statistics are available 
and are becoming more accurate. Marine and 
fire insurance experience extends over a long 
series of years. The costs of insurance are well 
known, or at least we know that a certain mini- 
mum amount must be collected. How much less 
might be sufficient is a debatable question, but 
there is no necessity to answer that question in 
the event the state should decide to monopolize 
the business. In short, the application of the 
insurance principle presents no great difficulties 
or risks. It is not a venture upon unknown 
seas. 



[13] 



CHAPTER II 

STATE INSURANCE IN PRACTICE 

IT does not follow from the preceding descrip- 
tion of insurance that great ability and 
skill are not required to administer the business. 
Nothing could be farther from the truth. Not 
only is great organizing ability required, but also 
great financial ability is demanded in investing 
and caring for the enormous trustee funds. It 
may be argued that it is in connection with the 
investment of these funds that the element of risk 
appears which justifies the profit to the individual. 
But an examination of the interest rate assumed 
and actually earned, together with the course of 
the interest rate during the past centuries and a 
study of its probable range in the future, removes 
any great doubt on this point. Very few of those 
who receive either interest or profit from the in- 
surance business would be bold enough to main- 
tain that this was a return either for the risk 
they had assumed or for their great foresight in 

[141 



STATE INSURANCE IN PRACTICE 



investing insurance funds. Before considering 
in detail the problems of state insurance of each 
of the kinds of insurance, a description of what 
has already been done by the different nations 
in state insurance will be of value. 

The most notable case of state insurance is that 
established by the Italian law of April 4, 1912. 
This law makes life insurance a state monopoly. 
The issuing of all policies of life insurance is in- 
trusted to a National Institute of Insurance, a 
department of the state to which the treasury 
of the state issues the money necessary for its 
operation. The net profit of operation goes to 
the public treasury for a fund to provide working- 
men pensions. However, it is not primarily finan- 
cial in its purpose ; for, as Minister Nitti insists, 
"the essential thing is not to obtain revenue for 
the state, but to render life insurance popular 
with the classes and to make it accessible to all." 
It must be emphasized that whatever profit re- 
sults does not go to pay the normal expenses 
of the state, but is to be set aside in toto for the 
specific social purpose of providing pensions for 
workingmen. 

It is to be especially noted that the law applies 
only to life insurance, and even in this case the 

[151 



INSURANCE AND THE STATE 

social aspect of such insurance is recognized by 
exempting the following classes of life insurance 
organizations: (a) Provident Institutions au- 
thorized by law to the service of pensions or 
annuities, (b) Banks of Providence recognized 
by royal decree, (c) Mutual societies the aim 
of which is not speculation and which insure 
their members for a sum not in excess of 1000 lire 
or pay an annuity not to exceed 400 lire, (d) Pub- 
lic and private institutions which directly grant 
pensions, rewards, or aid at the time of death of 
their employees, (e) Life annuities stipulated 
and acceding to the Articles of 1789 and follow- 
ing the Civil Code. The law nullifies all con- 
tracts of life insurance made after the law of 
1912 is placed in effect and denies a hearing in 
Italian courts on insurance contracts made in 
foreign countries. It is made an offense for a 
company or its agents to solicit life insurance, and 
in case this is done, the agent is fined, the contract 
is nullified, and the informer is given a part of 
the fine. 

All tontine and annuity companies are pro- 
hibited, and the present business of such com- 
panies, either foreign or domestic, must be liq- 
uidated. The law requires each company having 

[161 



STATE INSURANCE IN PRACTICE 

insurance policies in force to file with the govern- 
ment a detailed statement of each policy, and all 
such policies not so scheduled are declared null 
and void. Each policyholder is requested to 
see that the company so declares his policy, and 
if the company has not done this, the policy- 
holder must. It has been decided to grant a cer- 
tain number of years during which the transfer 
from private to state insurance may take place 
without causing too much damage. This inter- 
val also gives time for the National Institute 
to prepare itself to function properly. 

The following principles govern the relation- 
ship between the new state and the old private 
insurance. 

(a) No indemnity of any kind will be given 
to the private insurance companies, either domes- 
tic or foreign. Italy has no constitution. All 
laws are constitutional, and the Italian courts 
have no choice but to apply the law. Foreign 
companies, therefore, can have no indemnity 
granted by the Italian courts. What will be the 
result of the request which has been made by some 
of these foreign companies to their departments 
of state to take up the subject with Italy is a 
matter of conjecture. Such a question might 

[17] 



INSURANCE AND THE STATE 

reach the Hague Tribunal, and if an award in 
favor of the foreign companies were granted, an 
embarrassing situation might arise. If foreign 
companies were indemnified, certainly the Italian 
companies should also receive indemnities. 

(b) During a period not to exceed ten years 
existing companies may continue to do business 
under certain restrictions. Some of these re- 
strictions are that the company must turn over 
40 per cent of every risk to the National Institute ; 
within thirty "days after writing the risk the com- 
pany must send to the Institute a full description 
of the risk and give it an opportunity to accept 
or reject the risk. If the Institute accepts the 
risk, it becomes a creditor for a part of the 
premium to cover that part of the risk assumed. 

(c) All companies foreign or domestic may call 
upon the Institute to assume all its contracts 
of insurance written previous to Dec. 31, 1911. 
Companies continuing business under the ten- 
year limit can surrender their business at any 
time. The Institute must accept the business 
if the proper reserve is held on the policies. 

(d) If contracts are not surrendered, they must 
be executed the same as if there was no state 
monopoly. 

[18] 



STATE INSURANCE IN PRACTICE 

The National Institute of Life Insurance has 
a legal and financial autonomy. It is a public 
service under inspection, with provisions to ex- 
clude politics from its operation. It has its own 
budget, although the state guarantees the obli- 
gations assumed. The capital of the Institute 
is exempt from taxation, but the contracts of 
insurance are taxed. It has the postal and tele- 
graph franchise. In addition to the administra- 
tive officials and office force, agents are employed 
who are paid on a commission, proportional 
to the amount of the business secured. All per- 
sons actively engaged or interested in politics 
are forbidden to hold any administrative posi- 
tions, and in addition certain qualifications for 
the particular position must be possessed. The 
tenure of office is also secured. 

Switzerland, after a referendum vote, passed a 
law June, 1911, which provides for a state monop- 
oly of insurance against accidents and sickness. 
In addition certain cantons have government 
insurance against different risks. Some of them 
provide insurance against fire. This insurance 
is compulsory. The canton of Neuchatel has 
public life insurance. These various forms of 
public insurance do not, in most cases, provide 

[19] 



INSURANCE AND THE STATE 

for a public monopoly of the business. They 
compete with the private companies for business. 
In several of the German states public insurance 
is also found, but in no case is a monopoly of the 
business established. Bavaria, for example, has 
public insurance against fire, live stock, and storms. 
The German plan of workingmen's insurance 
by the imperial government will receive considera- 
tion later. In Norway public insurance against 
fire and accidents is found, but not as a monopoly. 
In Belgium and other European countries other 
examples of public insurance are found. The 
recently enacted National Insurance Law of 
England needs only to be named to call attention 
to this far-reaching experiment in state insurance. 
England has offered for many years industrial 
insurance through its post-office organization. 
Annuities have also been offered for many years 
without securing large results. In France state 
insurance is one of the most important questions 
of the day. During the last several sessions of 
the Chamber of Deputies bills have been intro- 
duced organizing a state monopoly of insurance, 
and important officials of the various governments 
of late years have declared themselves in favor of 
the plan so soon as a means of realizing the work 

[20] 



STATE INSURANCE IN PRACTICE 

can be devised. There exists already public 
insurance in France against accidents and fire, 
but these are without a monopoly. In some of 
the Australian states, especially New Zealand, life 
insurance by the state is provided, but here also 
it is found in competition with private companies. 
The United States also affords various examples 
of state insurance, the most interesting of which is 
probably the plan recently placed in operation 
in Wisconsin. The law passed by the legislature 
of 1911 provides for the sale of life insurance 
policies by the state, beginning Jan. 1, 1913. The 
law provides for a life fund beyond which the 
state is not responsible. The state treasurer 
is custodian of the fund, and all other matters 
in relation to the sale of the insurance are under 
the supervision of the commissioner of insurance. 
The premiums are based upon the American 
experience table of mortality with interest at 
3 per cent. The net premium thus provided for 
has added to it as a loading two dollars per year 
per thousand dollars of insurance and "an amount 
distributed equally through each of the possible 
premium payments, the present value of which 
shall be equal to one sixth of the present value 
of the costs of insurance on the basis aforesaid " ; 

[21] 



INSURANCE AND THE STATE 

that is, one sixth the present value of the net 
natural premium for that year's insurance. 

The factory inspectors of the state, the clerk 
and treasurer of every county, town, city, and 
village, and even state banks are made agents, and 
it is the duty of each to transmit to the insurance 
departments applications, when requested to do 
so. The commissioner of insurance and the state 
board of health pass upon all applications after 
a medical examination by a local physician has 
been made. The law provides for the accumula- 
tion of a surplus which is made up of 50 per cent 
of the net profits on each policy for the first year, 
and thereafter 5 per cent less for each succeeding 
year until the ninth year, and thereafter 10 per 
cent of such profit during the continuation of the 
policy. The interest on this surplus fund also 
becomes a part of this surplus which is to be held 
" to meet losses from unexpected or great mortality, 
or depreciation in securities or otherwise." The 
remainder of the profits are distributed annually 
to the policyholder. No revenue is sought by 
the state, but the expenses of transacting the 
business are to be met from the life fund. Any 
person is authorized to transmit applications for 
insurance to the state department, for which a 



STATE INSURANCE IN PRACTICE 

fee of twenty -five cents is paid. Likewise a fee 
of 1 per cent is paid for collecting and transmit- 
ting any premium, and such a person is held to be 
the agent of the insured. Similarly the individual 
may transmit his own application or premium and 
retain twenty-five cents or 1 per cent of the 
premium. Policies of life insurance are issued 
under most of the ordinary forms sold by private 
companies, but are in a sum of $500 or multiples 
thereof up to $1000 on a single risk until the 
number of insurants equals 1000, to $2000 until 
the number insured reaches 3000, and then not in 
excess of $3000 on a single life. The age limits 
are fixed at twenty and fifty years. It will thus 
be observed that the plan provided is conservative. 

The premium rates are less than those charged 
by private companies for the same kind and class 
of policy. This is especially true in the case of 
endowment policies, where the difference in the 
short-term endowments is as much as $10. In 
the case of a ten-year endowment at age thirty- 
five the loading in the state rate is only $2.77. 
Other aspects of the plan will be discussed when 
the detailed problem of a state monopoly of life 
insurance is considered. 

The Massachusetts plan of Savings Bank In- 
[23] 



INSURANCE AND THE STATE 

surance is not a pure example of state insurance, 
but it has some characteristics of state insurance. 
Under the law of 1907 savings banks under cer- 
tain conditions were authorized to sell contracts 
of insurance and annuities, the former granting 
indemnity in case of death not to exceed $500, and 
the latter paying in any year not more than $200. 
A special guarantee insurance fund must be pro- 
vided for the above purposes. The General In- 
surance Guaranty Fund is created a body corpo- 
rate, the affairs of the corporation being managed 
by a board of seven trustees appointed by the 
governor from the list of the trustees of savings 
banks and insurance banks. Only residents of the 
state can be insured under this law. No solicitors 
or collectors can be employed. The expenses 
of the actuarial, medical, and other services are 
borne by the state. The results achieved under 
the law are indicated by the following table : — 



Year 


No. of Savings Banks 
with Insurance 

Departments 


No. op 

Policies 


Amount op 

Insurance 


1908 


2 


282 


$114,953 


1909 


2 


2513 


992,761 


1910 


2 


3318 


1,367,363 


1911 


3 


5063 


1,956,038 


1912 


4 


6652 


2,528,809 



24 



STATE INSURANCE IN PRACTICE 

These banks have established agencies at various 
places in the state in savings banks, trust com- 
panies, stores, Y. M. C. A.'s, high schools, and 
memorial institutes, where application for insur- 
ance may be made and premiums paid. There 
are also two hundred unpaid agencies in mills and 
factories for the benefit of employees only. 

The total premium income for 1911 was $102,- 
832.27 and the total disbursements for the year 
$39,644.37, of which $21,877.67 was to policy- 
holders. This sum was divided as follows : $6513 
for death claims ; $7117.71 as dividends; $5850.04 
as surrender values; and $2189.19 as surrender 
values, used to buy paid-up insurance. The 
expenses for the year chargeable against the 
premiums were about 17.3 per cent, and the ratio 
of expense against the premiums after the first 
year was about 14 per cent. Notwithstanding 
this favorable showing and notwithstanding the 
numerous opportunities given to the public to 
purchase the insurance, the fact that only four 
savings banks and 6652 persons have in five 
years used the plan will be held to be by some 
strong indication of the final failure of the plan. 

The foregoing are then the chief examples of 
state insurance, with the one remaining exception 

[25] 



INSURANCE AND THE STATE 

of the state insurance for industrial accidents. 
The European countries again supply many ex- 
amples in this particular, but this form of state 
insurance is also being rapidly adopted in the 
states of the United States. Probably the Ohio 
plan is typical of what is attempted. 

The law of 1911 created a state insurance fund 
for the purpose of granting indemnity to injured 
workmen. The law is not compulsory, and it 
affects only employers who employ five or more 
operatives regularly in the same business. The 
expense of administering the fund is borne by the 
state. If an employer does not avail himself 
of the provisions of the law, he is denied setting 
up as a defense, in case of a suit, the defenses 
of assumption of risk, fellow servant, or con- 
tributory negligence. Compensation is provided 
in the case of all injuries received in the course 
of employment without regard to the question of 
negligence, except that no compensation is allowed 
for an injury which has been self-inflicted. The 
compensation received in case of injury is from 
$5 to $12 per week unless the wage is less 
than $5 per week, with the provision that com- 
pensation shall not continue for more than six 
years and that the total sum received shall not 

[26] 



STATE INSURANCE IN PRACTICE 

exceed $3750. If permanent total disability 
is suffered, similar payments are made during the 
lifetime of the injured employee. In case of 
death the dependents of the workmen are paid 
certain sums, depending upon the wage received. 
The fund is administered by a board of awards, 
which is given very large powers. The employers 
pay 90 per cent of the premium and the employees 
10 per cent, the premium being based upon the 
accidents of the industries according to the clas- 
sification made by the board. 

As amended in 1912, the law compels the em- 
ployer to pay all the premium or cost of the in- 
surance. A more important amendment was to 
make it practically compulsory for all employers 
of five or more workmen to insure with the state 
board rather than with the private company. 
The employer still has the privilege of refusing 
to take any insurance, but if he does, he is deprived 
of setting up as a defense any of the old common- 
law defenses. But if he insures, it must be with 
the state department, established for this purpose. 
There is only one exception. An employer or 
a mutual association of employers may provide 
the indemnity specified in the law, but in this 
event, he or they must submit to strict super- 

[271 



INSURANCE AND THE STATE 

vision by the State Board of Award. A bond 
for the security of the payments of the compen- 
sation must be given to the Board, and at all 
times the employer or the association must sub- 
mit to the detailed rules laid down by the Board. 
In the case of self or mutual insurance a contribu- 
tion must be made to the surplus fund which the 
Board is required to accumulate. This surplus 
fund is made up of 10 per cent of all premium re- 
ceipts until the fund reaches $100,000 and then 
5 per cent of such receipts until such time as the 
Board has decided that the surplus is sufficiently 
large. 

Another important provision was to make the 
insurance compulsory on the state, county, city, 
township, incorporated village, and school district ; 
that is, it is compulsory compensation for public 
as well as private employees. 

Rates are based upon a classification of occupa- 
tions with respect to their hazards, the pay roll, 
and the number of employees. It is the duty of 
the Board to ultimately fix and maintain the low- 
est rates possible for each class of occupations, 
consistent with the maintenance of a solvent 
insurance fund, the creation and maintenance of 
a reasonable surplus. Rates are adjusted semi- 



STATE INSURANCE IN PRACTICE 

annually, and if the experience in an industry or 
a plant shows that an unnecessarily high rate has 
been collected, the excess in it is credited to the 
future premiums due from the employer. 



29] 



CHAPTER III 

SHOULD THE STATE MONOPOLIZE LIFE 
INSURANCE ? 

IT may now be inquired after this survey of 
the examples of state insurance as to the 
grounds upon which such activity of the state 
may be based. It will aid to a better understand- 
ing of the question, if the consideration is taken 
up under the following three divisions : — 

(1) What considerations should cause the state 
to assume, either in competition with private com- 
panies or as a state monopoly, the business of life 
insurance ? 

(2) Would the same reason apply in the case 
of fire insurance ? 

(3) Would the same reasons apply to the mis- 
cellaneous lines of insurance, especially to sick- 
ness and industrial accident insurance ? 

If the state assumes the business of life insur- 
ance, it must be for one or more of three reasons : — 

(a) As a desirable source of securing revenue 
for the state. 

[30] 



STATE LIFE INSURANCE 

(b) As a social developmental activity whereby 
greater numbers may benefit from an applica- 
tion of the insurance principle. 

(c) As a method of completely regulating the 
business without the primary object either of rev- 
enue or of extending its social benefits. 

On the first point it may be questioned if life 
insurance is a proper source of revenue for the 
state. It is, as has been shown, a means of pro- 
viding a common need. It is an indemnity in 
part for the loss of life. It can be neither a 
speculation nor a source of profit for him who buys 
it. Its possession yields to him no income. It 
is property without revenue-yielding power in 
the possession of the holder, although this charac- 
teristic is lost when it becomes the property 
of the beneficiary; but it is not then insurance. 
It is the proceeds of insurance. Whatever rev- 
enue the state collects is collected for a public 
purpose ; that is, it is to be expended in furthering 
social well-being in some form. Therefore the 
collection of funds from the sale of insurance 
would logically imply that these funds were to 
be expended for a social purpose, not of equal im- 
portance to insurance, but superior to it. 

No other characteristic of political thought is 
[311 



INSURANCE AND THE STATE 

more significant at present than the remarkable 
growth of the idea that the state is an institution 
of the people, and as such should be used to 
further the interests of the masses. With this 
growing democratic conception it is difficult to 
imagine that the people would consent to the 
use of such a distinctively social institution as 
insurance for the purpose of financing other in- 
terests of the state. In the United States, where 
practical democracy is gradually taking the 
place of theoretical democracy, such a use of in- 
surance is scarcely conceivable. A democratic 
constituency of an elected representative would 
not consent to such an antisocial use of insurance, 
and because they are a popular electorate, a power- 
ful weapon for enforcing the wishes of the people 
would be in their possession by means of their 
voting power. 

How large such a possible revenue would be 
would depend upon such factors as the rates 
charged for the service, and the outlays for con- 
ducting the business. In 1911 the ordinary Life 
Insurance Companies in the United States had a 
capital of $46,712,523. The capital stock is in 
many cases, as in Mutual Companies, only that 
nominal sum which is required by the state laws. 



STATE LIFE INSURANCE 

The dividend paid on this capital stock was 4.3 
per cent. The total admitted assets were $4,164,- 
491,688, and the income from all sources during 
the year was $836,160,804. There was paid out 
for agents, other employees, and operating ex- 
penses $165,614,119. 

The dividends paid plus the reductions in this 
expense sum — if any could be made — would 
make up the possible source of revenue to the 
state. No capital stock would be required under 
state insurance because no dividends would be 
paid. Whether other savings could be effected 
will be a topic for later discussion. 

It might conceivably be argued that the state 
would derive a financial gain from assuming in- 
surance, in that a market could be made for its 
bonds. The insurance business is one which de- 
mands long-time investments. The state has 
such securities for sale. In reply to this argument 
it may be said that if the normal competitive 
market price is paid, there would probably be no 
need to make a market for their securities. If 
more than the market price is paid, this would 
again mean the using of insurance for the advan- 
tage of some other state activity, and this, it is 
believed, would not be permitted by the policy- 
» [33] 



INSURANCE AND THE STATE 

holders. But such a use of insurance funds is 
practically not possible. Only a part of the 
securities of insurance could thus be invested, 
because in some states the state securities are not 
large enough, and second, because they would not 
fall due at such frequent intervals as would be 
adequate to pay the constantly maturing policies. 
There is frequently great concern expressed about 
the large accumulations of insurance companies. 
Many imagine it is a concentration of wealth in 
the control of private individuals to be feared. 
Many honest-minded men consider these large 
aggregations of wealth either a proper subject 
for heavy taxation or a great opportunity for the 
state to derive profit by directly operating the 
business. They do not realize that these large 
sums represent only the small contributions of 
millions of people, and that the funds are liabil- 
ities in the hands of trustees, who should receive 
no profit from the use of strangers' funds, but only 
a wage for their services in caring for these funds. 
State Insurance may be urged on the ground 
of its social significance. That is to say, the state 
will go into the business for social developmental 
purposes, and not for the sake of revenue. It is 
undoubtedly this purpose which is commanding 

[341 



STATE LIFE INSURANCE 

most attention and which is chiefly responsible 
for the application of the scheme in the different 
examples that have been described. The plan 
appeals very strongly to the social-minded. Many 
have begun to realize the far-reaching possibilities 
of insurance as a social institution, and are eager 
to extend its application by seeking the influence 
of the state or demanding that it use its coercive 
power. 

It is undoubtedly true that the greatest enemy 
of life insurance is man's unwillingness to insure. 
But by what means can this unwillingness be 
removed ? What inducements for insurance can 
be supplied which are not now present ? 

Two methods of increasing the number of the 
insured stand out as prominent, and practically 
include all others : — 

First, by reducing the cost of insurance. 

Second, by educating the people to a more 
general understanding of insurance, and an appre- 
ciation of the services which it can render them. 
If, however, insurance could be reduced in cost, 
even with the present understanding of it, a great 
increase in the number of the insured would, 
without doubt, result. 

What, then, is the prospect that under a system 
[35] 



INSURANCE AND THE STATE 

of state insurance the cost would be reduced and 
thus the purpose of its assumption by the state 
would be secured, in that insurance would be 
extended in its application. This calls for an 
analysis of insurance costs which cannot give, 
however, a conclusive answer to the question. 
For purpose of analysis the costs of insurance 
may be divided into prime costs and operating 
costs. The prime costs may be investigated 
as a cost fixed by the mortality rate and the 
interest rate, and the operating costs may be 
divided into the two divisions of costs of secur- 
ing the business, or the agency costs, and costs 
of operating the business, or the overhead costs. 
As to mortality costs little need be said. The 
state would have no better source of determining 
its mortality charge than the companies now have, 
and private companies have, under competitive 
conditions, quite as much to gain from taking 
advantage of any improvements in mortality 
as the state would have. That is to say, if any 
one company knew it could safely reduce its pure 
mortality charge, it would usually be quite will- 
ing to do so, for the very powerful effect it would 
have in bringing to it new business by means 
of a reduction in costs to policyholders. The 

[36] 



STATE LIFE INSURANCE 

mortality table now in general use in the United 
States is the American Mortality Table, drawn 
up in 1869. It was based on a small amount 
at risk and is redundant, but this redundancy is, 
to a very large degree, discounted by the select 
and ultimate or preliminary term methods of 
writing policies and the dividend-paying prac- 
tice of the companies. In any case this table 
is the most accurate which is now available. It 
is the one which is prescribed for use in the state 
regulations of ordinary life insurance, and the 
one which has been adopted in the state insur- 
ance plan in Wisconsin. An investigation is now 
started which will result in a new mortality table, 
but whatever its showing may be, the policy- 
holders as a class will not be greatly benefited. 
It is well to have a new table, for insurance will 
be made more scientific, but it cannot affect 
materially the question of private versus state 
insurance. It will simply show to a certain de- 
gree the effect of the forces which have tended 
to improve mortality. The chief of these forces 
are the more intelligent selection of risks for in- 
surance and the better sanitary conditions of liv- 
ing as a result of advancing knowledge of the 
problems of health. Nor need much be stated 

[37] 



INSURANCE AND THE STATE 

in regard to the interest rate as it affects the 
problem of state and private insurance. The 
state has no mysterious power by which it can 
affect the interest rate. The American companies 
have most of their business on a 3 per cent, 3 J 
per cent, or 4 per cent interest basis ; that is, they 
assume they will be able to earn such an interest 
throughout the time of the contract. It is true 
that most of the companies are earning at present 
a rate in excess of these rates, but this surplus 
earning is also either discounted or returned to 
the policyholder. The average interest rate 
earned in 1911 was 4.6 per cent. In any event 
it is not probable that any state would transact 
the life insurance business on a higher interest 
basis, nor do the present plans of state insurance 
assume a higher rate. 

It may be argued that a combination of the 
business of all companies into one business under 
the state would secure better averages in mortality 
and interest. Any one conversant with the theory 
of insurance knows that the present business of 
all well-established companies gives ample oppor- 
tunity for the safe working of the law of average, 
both as to the mortality rate and the interest rate. 
It would therefore appear reasonably certain 

[381 



STATE LIFE INSURANCE 

that the state would not be able to effect any 
material saving either from the mortality or in- 
terest charges. Hence from these sources it 
could not reduce the cost of insurance, thereby 
making it more attractive and salable to greater 
numbers, which is the particular proposition that 
is now being considered. 

It is possible, as some contend, that under state 
insurance greater equity as regards classes of the 
insurable might be secured by minor adjustments 
of the above charges. That is, a more complete 
analysis of the mortality experience of different 
classes and the interest earnings on the policies 
of these different classes would result in an 
adjustment of these charges. This result is 
possible, but it must be understood that this 
would mean a higher charge for some if it meant 
a lower charge for others. Insurance cannot be 
argued as individually just. It does not concern 
itself with an individual, but with large numbers 
of individuals. It is a mutual arrangement whose 
results are always collectively fair and just. The 
old maxim, "that each tub should stand on its 
bottom, " has no application in insurance. There 
is nothing, however, to prevent the above adjust- 
ments from being made by state regulation under 

[391 



INSURANCE AND THE STATE 

a system of private insurance, if they are de- 
sirable and possible. The failure to devise a 
more equitable plan for distributing dividends 
as regards classes of policyholders and the heavy 
loading of the net premium on some classes of 
policies greatly reflect on the scientific character 
claimed for insurance. The contribution plan 
of distributing dividends, namely, that each 
policy should share in the earnings in the propor- 
tion that it has contributed to these earnings, 
is yet far in many cases from actual realization. 

Partly as a result of the investigations of the 
insurance business in 1905 and the succeeding 
years, and partly as a result of the voluntary acts 
of some companies, ^policyholders secured a re- 
turn of dividends which previously had gone to 
other persons. Companies can now be but little 
criticized because they do not return these over- 
charges to policyholders. Indeed the criticism 
would be more pertinent to say that an undue 
return is often made to some classes of policy- 
holders. One of the future improvements in 
insurance either to be adopted by the companies 
themselves or forced by the state is a greater 
degree of equity as regards groups in the returns 
or dividends to policyholders. Some companies 

[40] 



STATE LIFE INSURANCE 

are now distributing, in the form of dividends, 
earnings which could never have been earned 
by the premium which the policyholder paid who 
receives the dividends. While it is true that 
insurance can never be administered as a purely 
individual matter, yet this limitation or charac- 
teristic of it does not excuse the unduly high or 
low final costs to some groups of policyholders 
which now exist. Dividends are being paid on 
first-year premiums which must come from the 
earnings on old policyholders' premiums. 

If the prime costs of mortality and interest do 
not afford a good prospect of being reduced under 
a system of state insurance, what prospect of 
reduction exists in the case of the costs of securing 
and operating the business ? It may be noted at 
once that it is from these sources that the sup- 
porters of state insurance expect to make great 
savings and hence to make insurance cheaper and 
therefore more popular. The first part of the 
question, viz. the costs of securing the business, 
practically means the cost of having agents to 
solicit the insurance, and the saving to be effected 
must result either from doing away with agents or 
reducing the amounts paid to them. We are not 
without the benefit of experience on this point. 

[411 



INSURANCE AND THE STATE 

Attempts have been made in a number of cases to 
transact insurance without agents, and the results 
in each case have not so far justified the policy, 
so far as extending the social benefits of insurance 
would be accomplished. One of the best examples 
of this plan is that of the Equitable Assurance 
Company of London. This company has been in 
existence over one hundred and fifty years, and 
for nearly seventy years its advance has been a 
retreat. It has about $25,000,000 assets as a 
result of its century and a half of existence in the 
greatest center of population in the world. It 
has less than two thirds as much insurance in 
force as any one of several American companies 
accumulate in one year. Attempts have been 
made to sell insurance by extensive systems of 
advertising, but none of these attempts has 
had such success as would warrant the complete 
adoption of such a plan for all insurance. Insur- 
ance is a service, and not a commodity which can 
be sold direct from producer to consumer. The 
people do not yet understand insurance and its 
benefits. There are a large number deficient 
either in a proper conception of their duties to 
themselves and their dependents or in a lack of 
will power to carry out this duty. Probably not 

[42] 



STATE LIFE INSURANCE 

10 per cent of the business that is placed upon the 
books of insurance companies comes by voluntary 
acts of the insured. The individual must be 
solicited, either to inform him what his duty is or 
to persuade him to do his known duty. It is a 
bold venture to attempt at the present stage of 
insurance knowledge to sell insurance without 
solicitors, and few of the state plans of insurance 
propose it. Very few persons who have had practi- 
cal experience in the business of insurance indorse 
such a plan. As greater knowledge of insurance 
is possessed by the people, the possibility of suc- 
cess of such a plan may be greater. It is some- 
times argued that agents would be found unneces- 
sary if all companies would abandon the plan of 
using agents. This is to say, that competition is 
alone responsible for the existence of agents. 
Such a contention implies a belief that people 
know the benefits of insurance and will avail 
themselves of these benefits. 

It may, however, be urged that a saving may be 
effected under state insurance by reducing the 
amounts paid for soliciting the business, if not by 
doing away with agents entirely. This conten- 
tion implies that agents are now paid unnecessarily 
high wages. In 1911 there was paid in salaries, 

[431 



INSURANCE AND THE STATE 

commissions, and traveling expenses by the ordi- 
nary life insurance companies $94,277,144. But 
there is a monopoly neither of supply nor demand 
to fix price. If agents are highly rewarded, then 
this opportunity should attract, under the pre- 
vailing conditions of free competition, a large 
number of those who desire to secure this high 
wage. The insurance companies are always will- 
ing and anxious to secure good agents. The 
opportunity to earn the assumed high wage is 
present in the great number of the uninsured or the 
insured who can be persuaded to purchase more 
insurance. Young men are free to choose the 
business of soliciting insurance equally among 
many other employments. Yet there is a dearth 
of insurance agents. If it be replied, that there 
are few who are qualified for the work, that is, 
that a natural monopoly of supply exists, then it 
must be admitted that those employed earn their 
wage. Nor is there any reason to suppose that 
under state insurance the present agents would 
voluntarily work for a less wage. Itjs therefore 
difficult to discover any great saving in costs of 
securing the business under a system of state insur- 
ance, so long as human nature remains as it is and 
so long as general ignorance prevails regarding the 

[441 



STATE LIFE INSURANCE 

benefits of insurance. How rapidly these present 
conditions will be changed no one can say, and 
hence the potential economics to be effected in 
this particular remain unknown. 

Insurance officials and agents sometimes justify 
the existence of agents and the sums paid to them 
on the ground that the commissions paid represent 
an investment and a necessary investment, by 
the old policyholders. Whether this claim can be 
justified or not depends upon two points. First, 
has the particular company which the agent 
represents secured sufficient business to secure the 
average results from mortality and interest invest- 
ments ? that is, is there sufficient business for the 
law of average to operate ? Second, does an 
increasing business yer se bring a decrease in cost ? 
As to the first point, it should be understood that 
the old policyholder has no interest in having 
new business secured if he is securing the benefits 
of the law of average. However much others may 
benefit from being brought into the company and 
securing the advantages of insurance, the old 
policyholder is not concerned except as a philan- 
thropically minded individual. It is true, addi- 
tions should be made to keep in operation this 
law of average in mortality and investments, but 

f45l 



INSURANCE AND THE STATE 

the agency force of most well-established com- 
panies are doing much better than this. As to the 
interest which the old policyholder has in securing 
new business because it may mean a reduction in 
cost, that is the following subject for investigation. 
There remains, then, this other source from which 
a saving might be secured under state insurance, 
viz. the costs of operation. It is from this source 
that many who favor state insurance think great 
economies can be secured. In 1911 there was paid 
for operating or overhead expenses about $70,000,- 
000 from an income receipt of $836,160,804, which 
is about 8 per cent. The origin of the proposed 
economies, it is argued, will arise from the fact 
that in place of many competing companies with 
numerous administrative officials and clerks, 
occupying many expensive buildings, there will be 
one company — the state — with a limited num- 
ber of officials and occupying but one building. 
This contention demands careful study, not only 
as to the general assumption upon which it rests, — 
viz. that the insurance business is one subject to 
the law of decreasing cost, — but also as to the 
extent that savings can be made from specific 
sources, such as a reduction in rent and salaries 
for expensive administrators. 

[461 



STATE LIFE INSURANCE 

It may be inquired if the insurance business fol- 
lows the principle, that as the number of items or 
units are produced — which in insurance means 
policies sold — the cost per unit decreases. In the 
following table is given the result of grouping into 
classes according to the amount of new business 
written in the year 1911, the one hundred and 
forty-one leading insurance companies doing busi- 
ness in the United States. 

The percentage of the average expenses both to 
the average new business written and to the aver- 
age premium receipts is given, but the figures in 
column (g) are more significant than those in col- 
umn (/). The value of an average is always 
limited by the numbers upon which it is based, 
but it is submitted that the number of companies 
in each of the classes is sufficient to give a trust- 
worthy basis upon which the different averages 
are calculated. The high average of the group 
writing new business under $1,000,000 is to be 
explained by the fact that this group is made up 
largely of new companies which are establishing 
themselves as going concerns, and consequently 
the initial expenses are high. This fact also affects 
somewhat the group writing new business amount- 
ing between one and five million. It is significant 

[471 



INSURANCE AND THE STATE 



a a o 








ERCENTAG 
F AVERAG 
XPENSE T 

Premium 

Receipts 

(g) 










lO l> rJJ OS 




o 


M N O O) ^ i fi 




CO 


io co co cm cm cm cm 










fiOH 








& o 








o a h « 








Per- 

E NT AGE 
AVERAG 

iXPENSE 

New 

BUSINE! 


i> 


M O) W H ^ N K5 
lO O iO CO CO lO t^» 










o W 










co 


O t> lO CO rH o o 




a a 




O O "* CO tH o o 




O 02 


^ 


CO Tjt U3 lO N U3 O 




« a ^ 
a ft w 








cm 


lO rH rH CO CO CM CO 




lO 


<M O --I (M tJH CO l> 






i-H *sH l> r-i CM O CO 




<<H 




i-T cm" "?f "^ 




CO 








CO 

a 

H g 55 


co 


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CO 


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co 


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co" 


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CO 


■* cm co cm co a co 




CO 


00 1> M CO O J> ©_ 




^6* 




CM" CO" co" CO" lO r-T rt" 

rH r-l CO 1> CD 




fc 




rH 






CO 


O lO CO CD CM O CO 




Average 

Premium 

Receipts 

(c) 


o 


rf CO i-h CO -* O CO 






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CO 


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r-T cm" co" o" CO*" t|" 




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t> o So 








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to 




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a 




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s 




o o o o . 




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© - o o o o 




PQ 






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Z~ o o o o o 




New 

ritte: 

(a) 




O O O O O ,-T 

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gOHCqU5H§ 




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o o o o o 

O O "t 3 +3 "+3 H- 3 O 




o 




** "*" © o o o o 




o 


o O O O O O o 




© 


© O O O O O o 

°- °- o" o" o o" -H 




3 


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O O O O O O fn 




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o o O O O O a> 




fl o 

P rH* 


°. °> o" io »o* o~ > 

rH U3 rH rH CM tO O 




1 





[48] 



STATE LIFE INSURANCE 

that this table shows a decrease in average ex- 
penses to average premium receipts as the amount 
of business written increases. This is not, how- 
ever, a final proof, as will be noted later, that the 
insurance business is subject to the principle of 
decreasing cost, or at least it does not prove that 
the business can be increased indefinitely with an 
accompanying decreasing cost. However, an addi- 
tional and better test of the relation of expense to 
the increase and amounts of business may be 
applied, as shown in the following two tables. 
In Table II the twenty-three leading companies 
are taken and grouped according to the increase in 
their premium receipts during a decade, with a 
statement of the decrease in the classes of expenses 
and the total expense. If, then, from this table 
the average decade decreases in total expense for 
the given groups are calculated, the following 
results are given. For the companies increasing 
their premium receipts less than one million during 
the decade, 2.52 per cent; for the one to two 
million group, 4.52 per cent ; for the two to three 
million group, 2.67 per cent; for the three to 
four million group, 1.83 per cent; for the four to 
five million group, 7.65 per cent; for the five 
to six million group, 4.87 per cent; for the six 
e [49] 



INSURANCE AND THE STATE 



TABLE II 









Percentage to 


i'o. 








Premium 


o 8 8 3 


Companies 


Years 


Gross 
Premium 


Ot Com- 
missions 


Of Ad- 


H 1 S s 






Receipts 


and 

Agency 


minis- 
trative 
Ex- 


a J fi H 








Ex- 
penses 


penses 


Peb 
Tot 
clu: 
Pre 


1 Million or less In- 












crease in Premiums 












Berkshire 


1910 


2,387,150 


9.70 


5.87 


20.38 




1901 


2,173,932 


12.03 


5.75 


21.10 


Conn. General . . . 


1910 


1,573,092 


14.20 


6.57 


23.39 




1901 


608,275 


16.38 


9.77 


28.39 


Manhattan .... 


1910 


2,199,371 


10.44 


12.86 


41.34 




1901 


2,016,325 


19.32 


11.20 


43.18 


Pittsburgh Life & Trust 


1910 


2,639,542 


7.40 


8.44 


27.13 




1901 


2,421,699 


21.42 


12.67 


43.25 


Union Mutual . . . 


1910 


2,220,479 


11.45 


8.85 


24.22 




1901 


1,716,298 


23.21 


12.11 


38.57 


1 to 2 Million In- 












crease 












Conn. Mutual . . . 


1910 


6,122,457 


10.60 


5.55 


24.52 




1901 


5,024,351 


8.38 


6.62 


27.68 


Germania 


1910 


5,284,473 


16.26 


6.78 


25.84 




1901 


3,450,115 


16.63 


7.78 


28.31 


National Life . . . 


1910 


5,814,575 


13.49 


4.83 


21.69 




1901 


4,133,896 


17.35 


5.47 


27.28 


Home 


1910 


3,588,928 


13.22 


7.75 


24.06 




1901 


2,239,523 


18.84 


9.13 


32.42 


State Mutual . . . 


1910 


5,034,779 


11.35 


5.02 


19.55 




1901 


3,364,226 


14.22 


5.94 


23.58 


2 to 3 Million In- 












crease 












^Etna 


1910 


10,370,013 


11.89 


5.78 


22.44 




1901 


7,675,461 


12.96 


7.59 


23.85 


Phoenix 


1910 


4,590,123 


14.59 


6.50 


24.67 




1901 


2,523,979 


14.67 


10.11 


28.61 



50 



STATE LIFE INSURANCE 



TABLE II. — Continued 









Percentage to 


i o s 








Premium 














£ S % S 








o j as 


Companies 


Years 


Gross 
Premium 


Of Com- 
missions 


Of Ad- 


,, 2 Pi M 

u •< 2 a 
« h g a 






Receipts 


and 
Agency- 
Ex- 


minis- 
trative 
Ex- 








penses 


penses 




3 to 4 Million In- 












crease 












Mass. Mutual . . . 


1910 


8,947,788 


11.35 


5.49 


19.19 




1901 


5,133,843 


13.68 


6.31 


22.25 


New England Mutual . 


1910 


7,330,336 


12.41 


5.11 


21.24 




1901 


4,231,685 


11.31 


7.95 


23.69 


Prov. Life and Trust . 


1910 


8,448,518 


10.62 


8.17 


21.31 




1901 


5,485,068 


9.65 


4.98 


19.19 


Travelers 


1910 


7,107,477 


13.60 


6.04 


21.93 




1901 


3,593,938 


13.51 


6.27 


25.54 


4 to 5 Million In- 












crease 












Equitable 


1910 


51,027,173 


12.87 


4.56 


20.40 




1901 


45,463,740 


14.67 


6.78 


24.45 


Mutual 


1910 


52,106,429 


9.23 


4.99 


17.25 




1901 


47,811,869 


19.37 


6.27 


28.50 


5 to 6 Million In- 












crease 












Union Central . . . 


1910 


10,424,600 


12.45 


4.66 


22.21 




1901 


5,340,670 


15.26 


9.61 


27.08 


6 to 10 Million In- 












crease 












Mutual Benefit . . . 


1910 


19,632,149 


11.41 


5.28 


19.48 




1901 


10,839,495 


10.35 


5.40 


20.13 


Penn Mutual . . . 


1910 


17,858,958 


12.90 


4.12 


20.46 




1901 


8,830,040 


15.65 


5.93 


26.39 


Over 10 Million In- 












crease 












N. Y. Life 


1910 


79,547,606 


8.83 


3.60 


14.24 




1901 


54,435,814 


17.07 


6.46 


25.35 


Northwestern Mutual . 


1910 


38,743,935 


10.79 


3.67 


17.12 




1901 


22,609,544 


11.88 


4.25 


19.73 



51 



INSURANCE AND THE STATE 

to ten million group, 3.29 per cent; and for the 
over ten million group, 6.85 per cent. If, how- 
ever, it is objected that a grouping according 
to increase in premium receipts with reference to 
the expenses is not a test of the relation of ex- 
pense to increase in business because of the fact 
that a small company may show an enormous 
increase in premium receipts during the decade, 
while a large company may show a small increase, 
and because, further, that a particular company 
may have sold a large number of large premium 
policies, such as endowments, which would not 
mean unduly large proportional increase in amount 
of insurances in force, the following statement 
may be given of the business of the twenty-one 
leading companies for the decade 1901-1910. 

Six companies had an average business in force 
for the decade of less than $100,000,000, and in 
this group the average decrease in the expenses 
was 7.35 per cent. Eleven companies had an 
average business in force between $100,000,000 
and $500,000,000, and the average decrease in their 
expense was 3.64 per cent. Four companies had 
an average business in force of over $500,000,000, 
and the average decrease in their expense was 
7.25 per cent. 

[52] 



STATE LIFE INSURANCE 

As reflecting some light on the relation of ex- 
pense to increased business the following table 
may be given for the twenty-five leading life 
insurance companies for the total business of four 
years. 

A study of this table gives some support to the 
contention that the efficiency of private insurance 
is increasing. Column (4) indicates that the 
gross cost for the larger volume of business in 1910 
was less than for the smaller volume of 1907, and 
column (5) indicates that for the same amount 
expended in 1907 and 1910, almost $500 more of 
new business was secured. 

Yet none of these tables gives an answer to the 
question, would the state be able to reduce greatly 
the expenses of insurance, because it would com- 
bine the business of all the companies ? Even 
granting that the tables give some support to the 
contention that a greater volume of business may 
be accompanied, and usually is, by a reduction in 
the expense, it does not follow that the reduction 
would be a continuous one for unlimited increases 
in the volume of business. It is in all probability 
only a question as to how soon forces would 
begin to operate to cause the business to be done 
at a greater cost per unit, and it is probable that a 

[53] 



INSURANCE AND THE STATE 



H 






STRATION, 
CAL AND 

L EXPENS 
REMIUM 


Ttl OS 


O O 


co q 


<M OS 


MINI 
LERI 
DICA 

:o P: 


io »d 


id rh 






QOa p 






< S 






Q 






fc 






■< O 

« (h H a 

fe O H t> 


^ 




TjH OS 


<N O 


2 * S s 

02 B W H 


OS OS 


<M OS 

© © 


*i Z, cl, K 

%< Bis 




H i—l 






§ H 






o 






CO O 






« « H 






S H P 






s s 5 






5 a g 

13 H M 
PQ « r T 


O rfH 

CO 00 


S2 


CO CO 


b- 00 


~ gw 


CO CO 


CO CO 


1 £<=> 


m 




a s o 






|7 05h 






,. fc B 






Gross Cosi 
Per Cent o 
Premium Un 


c^ 




<n r> 


OS b- 


id © 


CO CO 


00 00 


l> !> 


w 03 






fc » 






&§ | 


o o 


o o 


s» S 


OS TjH 


00 CO 


B «« 


TH* CO 


tjh id 


* H te 
W h P 


CO CO 


co co 


m 




K H 






Ph 15 






t« 


© o 


o o 




ss 


<n q 


^5» 

. (5 o a 


oo" os~ 


os" id" 


00 CO 


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l> © 


OS 1> 


a S 3 o 
PQ o 






io" c£ 


<m~ © 


OS CO 


CO to 


Ph 


CO 1> 


00 OS 


« 


l> 00 


OS o 


<J 


o o 


O i-H 


H 


os os 


OS OS 


►* 


i—l tH 


fH v-i 



54 



STATE LIFE INSURANCE 

state would be no more exempt from the final 
operation of such forces than is a private company. 
This limit has certainly not been reached by any 
of the private companies, and any legislation 
restricting the amount of new business which a 
company can write must be justified on grounds 
other than that it means an increase in unit 
expense for the business. 

As regards such savings in operating expense as 
salaries of directing officials and other heads of 
executive departments, there would be consider- 
able opportunity for economy. These administra- 
tive positions call for very high-grade ability, but 
doubtless one medical examiner or one president 
could direct with efficient subordinates the work of 
the insurance of the state which is now done by the 
same officials of the several companies within the 
state. But this again assumes that these executive 
officials of private companies are overpaid ; that 
is, that they receive a certain salary for work which 
does not occupy their full working hours, and that 
they could be more completely occupied in their 
field of work. 

We need not, at this point, discuss the ques- 
tion whether the state could or would secure 
and retain men of as high-grade ability to con- 

[55] 



INSURANCE AND THE STATE 

duct the business as are now employed by the 
companies. 

The savings from rent for most states would not 
be great, since the insurance now in force in many 
states has been sold by companies whose home 
offices are in other states. It is true that some of 
these foreign companies maintain branch offices, 
and so far as this is true the possible saving from 
this source would be augmented. Those states 
which have old companies with a large volume of 
business would be able to effect the greatest 
savings from rent. 

It is sometimes argued for a system of state 
insurance that the policyholder would know 
definitely what the costs were, and he would not 
be at the mercy of the companies as he now is. 
It is said that the prospective purchaser cannot 
distinguish one company from another as to costs, 
and that after he becomes a policyholder he has 
no choice but to continue as a member, however 
unsatisfactory the returns or costs are to him in 
his company as compared with those in another 
company. There is a large element of truth in the 
statement. He certainly has no choice about 
continuing a member, unless he chooses to lose 
his policy by lapsing. Yet it must be remembered 

[561 



STATE LIFE INSURANCE 

that a company is not absolutely free to increase 
costs. A company does not begin nor at any one 
time has it a complete membership. Continued 
additions must be made to secure average results 
in mortality and interest earnings. There is, there- 
fore, the necessity all the time to make a good 
showing, for there is no greater inducement for 
prospective buyers than low initial costs. Doubt- 
less many buyers cannot make an intelligent 
comparison of companies, but the prevailing con- 
ditions of competition among the companies pre- 
vent unusually high costs on the part of any one 
company, and the supervision by the state guaran- 
tees adequate costs on the part of all. Yet it 
must be admitted that competition is not so per- 
fect as to secure full protection to the policyholder. 
For this result to be secured, the buyer would 
need to have sufficient knowledge to bargain with 
the seller, and this is not the case with the buyer of 
insurance. Particular policies are now sold which 
the purchaser would never buy if he knew more 
about insurance. Can it be assumed that under 
the state each kind of policy will be sold at its 
lowest possible cost, and will have incorporated in 
the contract every possible privilege for the buyer ? 
Under a state monopoly this comparison could not 

[571 



INSURANCE AND THE STATE 

be made. Whether private insurance costs are too 
high and whether state insurance costs would be 
lower is the point at issue. However belated 
some of the reforms in insurance have been, it 
must be admitted that many of the so-called bene- 
fit privileges in the policy have resulted from this 
competition among companies. This is not to 
argue that insurance, as now administered, is per- 
fect. Many reforms are awaiting accomplish- 
ment. Greater efficiency in many phases of the 
business can be accomplished. Whether these 
reforms and this greater efficiency would be accom- 
plished more rapidly under state insurance is a 
question upon which there is difference of opinion. 
The officials of private insurance who are interest- 
ing themselves in a campaign of public education 
on insurance should realize what this campaign 
if it is successful will mean. Demands will be 
made after the public is informed upon insurance, 
which will not be easy to meet. 

They will demand greater efficiency and lower 
costs than now prevail. They will demand a better 
enforcement of the trustee relationship of the offi- 
cials, and an extension of the insurance principle. 

This concludes the consideration of the subject 
of increasing the number of insured by reducing 

[581 



STATE LIFE INSURANCE 



< 


9) 

.s 

'3 

! 

"o 

1 
o 

a 
< 


2,262,847,000 
1,584,717,000 
4,049,578,567 
8,562,138,746 
16,404,261,042 


.s 

'3 
1 

1 


O ^ O N(N 
(N CO 05 ^ 00 
N CO © CO iO 

oT co" co" io oo" 

CO h o CJ 00 
00 OS <N CO Oi 

io" t}T o>" 

i-H CQ 


< 
2 
g 

p 

Q 

K 


.2 
'5 

-2 

§ 
o 

a 
< 


20,533,469 

429,521,128 

1,468,986,366 

3,177,047,874 


m 

'3 
o 

*o 

1 


236,674 

3,883,529 

11,219,296 

23,034,463 


a 

a 

K 

< 
55 

1 

O 


m 
.2 

'3 

o 

1 
o 

a 
< 


2,262,847,000 
1,564,183,532 
3,620,057,439 
7,093,152,380 
13,227,213,168 


OQ 

'3 

6 
5? 


CO O i— I i— l Oi 
<M Oi CO tO i-i 
°l *£ S. °~ r l 

Oi Oi Oi CO "^ 
MN h N iQ 
00 CD CO i-h oi 

i-i co" co" 


1 

l 
> 


< 


O O O O O 

NOOOOh 

oo oo oo o> os 

i— 1 i— 1 i— 1 tH y—{ 



a 
o a 

a a 
o o 

« 55 

a *-• 

Oh 


I | Mhh 

| | OHO 


Insurance in 
Force 


$2,262,847,000 
1,584,717,001 
4,049,578,567 
8,562,138,746 

16,404,261,042 


a 
3 H 

t < 

£ a 
a k 

« z 
a m 
P4 


1> i— 1 i— 1 t> OS 

co id co o o 

00 "<c8 (M (N c3 


W 

< 
1 


$30,068,518,000 
43,642,000,000 
65,037,091,000 
88,517,306,775 

107,104,211,917 


a 

Bil 

a a 

« 55 


O (N iO W h 

(N O O H H 

CQ CO <N <N <N 


55 
O 

H 
< 
J 
P 
fc 
O 
Ph 


38,558,371 
50,155,783 
62,947,714 
75,994,575 
91,972,266 


K 

-< 

a 


o o o o o 

N00OOH 
00 00 00 Oi Oi 
rH tH i— 1 i— 1 tH 



[59 



INSURANCE AND THE STATE 

the cost. There remains the possibility of increas- 
ing the number of the insured by increasing under 
state insurance the knowledge of insurance. This 
would justify its assumption by the state for 
social-developmental purposes. In this connec- 
tion it may be inquired to what extent has private 
insurance met its opportunity. 

Table IV shows increase of insurance by decades. 

As a partial but not a conclusive test of private 
insurance embracing its opportunity, a compari- 
son of the above total of ordinary and industrial 
insurance may be made with the growth of popula- 
tion and the increase in national wealth. This 
comparison is shown in table V. 

If we consider percentages alone and include the 
percentage increase in policies as well as amounts 
of insurance, the following results are shown : — 

TABLE VI 



Year 


Percentage 
Increase in 
Population 


Percentage 

Increase in 

Wealth 


Percentage 
Increase in 
Amount of 
Insurance 


Percentage 

Increase in 

Number of 

Policies 


1880 
1890 
1900 
1910 


30.2 
25.5 
21.2 
21.1 


45.1 
26.1 
20.7 
20.9 


153 

111 

91 


20 
467 
175 
105 



[60] 



STATE LIFE INSURANCE 

Statistics either as to the number of people 
insurable or as to the number of different persons 
insured are not available, and only rough estimates 
can be made. In 1910 there were in force 
38,546,675 ordinary life policies, industrial policies, 
and fraternal certificates. How many persons 
does this number represent ? Estimates from 
insurance officials differ somewhat. In one of the 
oldest and largest ordinary life companies the 
percentage between the number of policies and 
different policyholders is 71 per cent. In one of 
the promising new companies which has been in 
business six years the same percentage is 97 per 
cent. However, it must be remembered that while 
a person may have only one policy in a particular 
company, yet he may have policies in other com- 
panies, and this would result in duplication. Pos- 
sibly one might venture the estimate that the 
7,000,000 policies of ordinary life insurance are 
held by about 3,000,000 persons, and that the 
total 38,000,000 policies of all kinds are held by 
about 20,000,000 of people. These are, however, 
but estimates in lieu of any definite statistics. 
However, in order to test the extent to which pri- 
vate insurance has met its opportunity, we should 
know the number of people insurable, and in this 

[61] 



INSURANCE AND THE STATE 

connection estimates are more unreliable. A large 
percentage of the people are insurable in industrial 
insurance, but a smaller percentage in fraternal and 
a still smaller number in ordinary life companies. 
We may use the percentage of the 1900 census 
and find that the number of males between 21 and 
60 years of age is 22,793,946. But women are 
being solicited for insurance, and children, as 
well as those over 60, are insurable under the indus- 
trial plan. Then, too, by the advances in knowl- 
edge, both as to health and from insurance experi- 
ence, many previously uninsurable are brought 
in the class of insurable. However far private 
insurance has failed to insure the insurable, the 
results which have been achieved, as shown in 
Tables I and II, acquit the administrators of 
private insurance of any charge of slothfulness in 
increasing their business. 

It is urged that state insurance would educate 
the people on the subject of insurance. It is 
probably true that the novelty of the plan would 
attract some attention at first, but it is very ques- 
tionable if any permanent or widespread educa- 
tion would result from the mere fact of state insur- 
ance. If the state should enter upon a campaign 
of public education, this would entail costs which 

[62] 



STATE LIFE INSURANCE 

would need to be met either from the insurance 
collections or from some source of state revenue. 
The greatest single force to-day for educating the 
people on insurance is the 75,000 insurance agents, 
and if the state is to transact the business without 
agents, the campaign of education would need to 
be planned along very broad lines, and hence the 
cost would be proportionally high. 

Another phase of the educational work of state 
insurance has been suggested in the effect it would 
have in stimulating interest in honest and efficient 
government. Something may be accomplished 
in this respect ; but should a policyholder feel any 
more interest in the honesty and efficiency of the 
state official who collected and invested his pre- 
mium than a taxpayer should feel interest in the 
honesty and efficiency of the state official who 
assessed, collected, and spent his tax ? 

A minor reason assigned for state insurance, as 
a means of increasing the popularity of insurance, 
is that the people would have great confidence in 
its security. Yet it is safe to say that one of the 
least serious objections to overcome in selling 
insurance is the one that the companies are not 
sound. The investigations of 1905 and those 
made since proved beyond doubt that the financial 

[631 



INSURANCE AND THE STATE 

security of the companies is beyond question, and 
few prospective buyers of insurance offer this as a 
vital objection to the purchase of insurance. 

Again, it is urged that under the state, insurance 
would be applied to risks not now insured by the 
ordinary private company. It is pointed out that 
insurance companies do not solicit insurance from 
those whose ability to pay premiums is doubtful, 
although they may be excellent physical risks and 
might greatly benefit from the use of the insur- 
ance principle. 

It is well known that the insurance companies 
endeavor to keep their lapse rate low. Then, too, 
but few companies will insure other than standard 
lives; that is, those of normal physical vigor. 
Could the state afford to insure those of good 
physical vigor but of limited financial means ? 
Certainly the mere fact of being insured under the 
state cannot affect their financial ability. That 
weakness is fundamentally due to other causes. 
So far as lapses are avoided, simply because they 
are used as arguments against the company in 
selling its policies in competition with other com- 
panies, so far they could occur under state insur- 
ance. But so far as lapses unfavorable affect the 
cost of insurance, so far the state could not afford 

[64] 



STATE LIFE INSURANCE 

to have them any more than a private company 
can. Could substandard lives be insured under 
state insurance ? This question must be answered 
by deciding whether the state would be more active 
in collecting data and drawing up tables under 
which such lives could be insured. It is quite 
possible that an active and capable department 
of insurance would make a much wider applica- 
tion of the insurance principle than is now found 
under private insurance. 

State insurance may be urged neither for the 
purpose of deriving revenue nor for distinctively 
social purpose, but as the only satisfactory method 
of regulating a private business. The necessity 
for such a regulation must arise because of one or 
more of the following reasons : — 

(a) Because it is or threatens to become a 
monopoly, characterized by the exercise of op- 
pressive power ; 

(b) Because there is unregulated and injurious 
competition ; 

(c) Because the private companies represent 
unduly large concentrations of wealth ; 

(d) Because the policyholders cannot be assured 
protection by the present system of regulation. 

It is sometimes said that insurance tends to 
f [651 



INSURANCE AND THE STATE 

become a monopoly, and the proof of the statement 
is given that only a few large companies exist in 
the several countries, and that these companies 
make agreements to impose certain conditions 
upon policyholders. In the United States there 
are 238 life insurance companies listed in the 
Year Book for 1911. During the past decade 
many new companies have been formed. Nor is 
it true that the companies are either all large or 
small. Six companies wrote new business during 
the year amounting to over $100,000,000 each; 
four from $50,000,000 to $100,000,000; seven 
from $25,000,000 to $50,000,000; twelve from 
$15,000,000 to $25,000,000; eleven from 
$10,000,000 to $15,000,000; twenty-seven from 
$5,000,000 to $10,000,000 ; fifty from $1,000,000 
to $5,000,000 ; and twenty-four under $1,000,000. 
Additional evidence offered as a proof of a 
monopoly is that the price charged for the service 
is largely uniform in all companies. This, it is 
urged, proves agreements among the companies. 
This evidence cannot be admitted for the reason 
that insurance costs, at least primary costs, are 
determined for the companies by the mortality 
and interest rate, and for the well-known fact that 
in the United States at least there has been an 

[661 



STATE LIFE INSURANCE 

unfortunate lack of agreement among the com- 
panies. It has been difficult to secure some co- 
operation from the companies from which the 
public might receive great gain. Insurance in the 
United States has not been injured by agree- 
ments, but from the lack of them. 

Is there unregulated or injurious competition ? 
It must be admitted that notwithstanding the 
great improvement in state legislation, enacted 
for this purpose especially since 1905, full regula- 
tion in this respect has not been realized. It is 
true that the security of the funds of the policy- 
holders, at least the funds to mature their con- 
tracts, is well assured by the state laws regarding 
the methods of the valuation of policies and the 
investments of the funds of the companies. But 
it is also true that new companies are permitted 
to sell their stocks upon almost any terms in 
many of the states. Companies are permitted in 
some states to spend recklessly policyholders' 
money in building expensive home offices or in 
other questionable methods of advertising. It is 
suspicioned that some companies are permitted 
to "juggle" their funds in the distribution of 
dividends, with the result that classes of policy- 
holders suffer unnecessarily in equitable returns. 

[67] 



INSURANCE AND THE STATE 

As to the third argument, that private companies 
represent unduly large concentration of wealth. 
The large size of a few companies has not been 
accomplished by amalgamation, as is true with 
many other examples of "big business" in the 
United States, but by the development of a single 
unit. Therefore there has not been for this par- 
ticular reason a restriction of competition. If, 
however, the increase in age of the company does 
not mean an increase in the cost of insurance, 
but a decrease in cost, or at least a cost as low as 
other competing companies, is there any good 
reason to restrict by law the size of companies ? 
We are prone in these latter days to condemn any 
financial organization that is large, because great 
evil has been found in connection with some of the 
large financial concerns. It is, however, probably 
true that the top of the curve of increased size 
in the large companies has been reached, for the 
margin of insurance added each year over insur- 
ance lost is growing smaller. But a final answer 
to the objection is that the states can, as New 
York now does, restrict the growth of a company 
by limiting the amount of new business which it 
may write each year. 

Another reason sometimes urged for the com- 
[681 



STATE LIFE INSURANCE 

plete regulation of insurance by means of state 
insurance is that more liberal provisions in policies 
would be granted. However late some of the 
rights have been granted to policyholders, there 
is in the states of most advanced regulation little 
cause of complaint at present on account of the 
absence of privileges in the policies. The states 
have complete power to enforce desirable liberal 
provisions, and if they do not now choose to do so, 
it is difficult to understand why they would do 
this if the states were selling the policies. Such 
an argument arises from the memory or knowl- 
edge of those times when the insurance contract 
was drawn up with little consideration to the 
policyholder. Insurance managers have a new 
conception of their duty to the public, whether this 
conception has arisen from the compulsory act 
of the state or has resulted from a new vision of 
the business. 

Such a minor argument, that by state insurance 
much money would be kept in the state, deserves 
no critical consideration, were it not for the fact 
that it is seriously offered by those in responsible 
positions. It is a modern form of that old argu- 
ment originated by the medieval mind and still 
kept alive by those of modern times who afford us 

[69] 



INSURANCE AND THE STATE 

an example of how this medieval mind worked. 
Capital is mobile and is not governed in its move- 
ment by sentiments of the hearth and home. 
Capital will remain in the state if it can receive as 
good return as it can abroad. If it cannot, is there 
not every reason why policyholders' money should 
leave the state? for the state must certainly be 
interested in supplying the insurance — a social 
benefit — under the lowest possible cost, if the 
state transacts the business. 

Some will oppose state insurance, for fear that 
it cannot be kept free from the politicians, and not 
because they do not believe the state should not or 
could not do this work. It is said that our govern- 
ment is a government of parties, and that the 
prime object of a political party is to secure con- 
trol of offices. The evil effects, it is supposed, 
might result from two sources. First, by a politi- 
cal party in power selecting inefficient administra- 
tors of the state insurance. Second, by bidding 
for votes by promising reduction in costs of the 
insurance or by the extension of benefits which 
would impair the security of the contracts, however 
efficiently the business might be managed. Under 
our changing party officials it is frequently difficult 
to realize a high grade of efficiency. Of the 45 

[701 



STATE LIFE INSURANCE 

superintendents of insurance in 1902 only 4 were 
in office eight years later. If this should occur 
under a system of state insurance, it would doubt- 
less mar the efficiency of the service, if it did not, 
as it probably would not, prevent the carrying on 
of the work. Yet it is urged that civil service is 
an answer to the above objection. But civil 
service is not synonymous with efficiency. Much 
depends upon the type of men who direct the civil 
service and the law itself. For many kinds of 
ability civil service systems have devised no satis- 
factory test. Especially would this be true in 
attempting to test an individual's fitness to con- 
duct a system of state insurance. Civil service 
has not yet solved the question of what shall 
be done with the inefficient individual who has 
secured his position by meeting its tests. The 
state has not yet succeeded, in the United States 
at least, in securing and keeping the highest grade 
of ability. The rewards in private business are 
often so much greater, especially in financial lines 
of business and managerial positions, — the im- 
portant lines in a system of state insurance, — that 
some provisions would need to be made to meet 
this demand of private business. 

Lamentable as it may seem to some persons, 
[71] 



INSURANCE AND THE STATE 

the satisfaction which comes from doing a public 
service efficiently and in doing it for that indefinite, 
intangible, public good, and the inspiration which 
comes from being a faithful servant of the people, 
are not as strong motives to conduct as those which 
come from the prospect of receiving a full mone- 
tary reward for efficiency, and from the pleasure 
received from winning victories in the competi- 
tive game of business. We have many faithful 
and honest men in public life, but too few efficient 
ones. It must be recognized, however, that there 
has been a very great improvement in public 
service, and that probably even greater improve- 
ment is promised. It is becoming the rule to 
select officials for public service because of their 
specific training for a work, and not merely by 
examination. Finally, it may be pointed out in 
regard to civil service, that it is not chiefly in 
completely testing fitness for office which promises 
so much good for the public, but rather in prevent- 
ing the removal without cause of a public official 
whose efficiency has been proven by services 
rendered. 

A minor argument offered against state insur- 
ance is that there would be an unfavorable selec- 
tion of risks. If there should be no agents, it is 

[72] 



STATE LIFE INSURANCE 

said that only those who were much concerned 
about securing insurance would go to the trouble 
of seeking it, while other better risks would wait 
to be solicited by the agents of the private com- 
panies. This assumes that there would not be a 
state monopoly of insurance. Again it is urged, if 
there were agents who were paid less than agents 
are now paid, that they would be induced to solicit 
applications somewhat indiscriminately, in order 
to secure the many small commissions. The agent 
of the private company realizes that his position 
depends upon having a large percentage of his 
risks accepted by the company. It is also urged 
that, if there were no agents as such, those 
state officials empowered to transmit applications 
would be willing to render the service for any one, 
and that medical examiners might be less careful 
than they now are, in that the benefits to an indi- 
vidual and often a friend would be balanced over 
against the duty to the state. These, however, are 
gratuitous assumptions which can be verified or 
disproved only after a longer mortality experience 
of state-insured risks is available. 

It has been shown that only in one case is a 
monopoly of state insurance provided. This 
seems very desirable, especially as a plan of pro- 

[731 



INSURANCE AND THE STATE 

cedure for the states of the United States. This 
would give opportunity for organizing the work 
and making the necessary adjustments in our 
system of administrating the business of the state 
and preparing the public for state insurance. 
It is not probable, however, that even a state 
monopoly would prevent fraternal or purely 
mutual insurance, for the state is to assume it 
chiefly for the social benefits, and if the public 
is voluntarily doing what the state proposes to urge 
them to do, there would be no reason to prevent 
purely mutual insurance. 

There remains for consideration but the final 
question of indemnity to private companies, for 
it is scarcely to be doubted that the logical result 
of state life insurance will be the state monop- 
oly of life insurance. This monopoly might be 
brought about for two reasons. 

First, because the state had initiated state 
insurance and felt that it had properly organized 
the work, and yet sufficient risks were not being 
secured. 

Second, because it became immediately suc- 
cessful, and the social results were so evidently 
good, that a complete monopoly would seem 
quite justifiable. 

[741 



STATE LIFE INSURANCE 

In such an event must an indemnity be granted 
to the private companies ? Before inquiring if any 
provisions of the federal or state constitutions 
would be a bar to such a monopoly without in- 
demnity, let us consider it from the broader aspect 
of the relation of a state to its citizens and their 
property. 

In early times it was the fashion to justify acts 
of the state under the formula that the "state 
is sovereign and therefore irresponsible," but in 
the later days of constitutions we are wont to 
justify acts of the state by other than an appeal 
to the vague pretext of sovereignty. The ques- 
tion is complicated by the fact that rights of for- 
eigners would be affected by a state monopoly of in- 
surance, since in many states companies of foreign 
nations have policies on the lives of citizens of the 
state. Under international law the sovereignty 
of the state is not positively admitted, and a state 
is responsible for all violations of the rules of inter- 
national law, notwithstanding the fact that the 
act of injury results from a positive national or 
state law. It cannot evade responsibility by 
appealing to the sovereignty which authorized the 
legislative act. But does it follow from this that 
a state would be responsible for any financial loss 

[751 



INSURANCE AND THE STATE 

suffered by a foreign insurance company, if the 
insurance business was made a monopoly by the 
state ? A recent writer has said on this point that 
"it is necessary to lay stress on the judicial nature 
of the act creating the insurance monopoly. The 
act which creates the monopoly is a law in the full 
meaning of the word. Law is a general and imper- 
sonal rule, and the essential element in a legislative 
act is the prescribing of a course of social conduct 
which must be observed by persons in general. 
The organization of a public monopoly of insur- 
ance is essentially for the purpose of regulating the 
activity of individuals in a certain field." It 
applies to all, but only to a special field, just as a 
regulation of commerce, industry, or a profession. 
It is but prescribing by the legislature that the 
activity of individuals shall be exercised only in a 
certain manner and shall conform to a certain idea 
of social justice and public utility. But it is said 
that the extent of legislative power will be deter- 
mined by the character of the thing forbidden to 
an individual. The doing of certain acts carries 
with it a generally admitted public injury. Such 
acts as prohibiting the importation of immoral 
books, the manufacture and sale of harmful drugs, 
are too well established to need a discussion of 

[761 



STATE LIFE INSURANCE 

their justification. All such laws , depend upon 
the ideals of justice prevailing at a given time 
in a country which requires the state to protect 
the physical and moral welfare of its citizens. 

But a distinction is to be made in regard to a 
state monopoly of insurance. In such a case, not 
only is the individual to be denied the right to 
engage in the business, but he is to be forced to give 
up his property rights in the business, and the 
state is then to do what it prohibits the individual 
from doing. It may be urged that every legisla- 
tive reform is a gain for some and a loss for others ; 
that progress would be impossible if, at each stage 
of its forward march, it were necessary to pay 
toll to the privileged ones who were profiting by 
the preceding circumstances. But does the state 
enrich itself ? It has no wealth other than that 
of its citizens. The state assumes the monopoly 
for the social benefits resulting, and not as a source 
of revenue. A damage which can secure an indem- 
nity must secure it from the fact that the damage 
was a special one. For the welfare of the com- 
munity the monopoly of insurance is assumed. A 
damage is caused to those who were in that busi- 
ness, but it is a loss borne for the common interest, 
and no particular individual benefits from the 

[77] 



INSURANCE AND THE STATE 

damage inflicted. The damage done by a law of 
this character is never a special damage because 
the general impersonal character of the law itself 
is contrary to it. It cannot be said that those 
engaged in the business at the time of the enforc- 
ing of a state monopoly of insurance would alone 
suffer a loss. Every one who intended to engage in 
the forbidden industry might be said to suffer a 
loss, and an acceptable doctrine of special damages 
might be held to include this class. Nor can it be 
held that the damage arises from any damage to 
tangible property, since an insurance company 
has but little of real property. It is the taking 
away of an employment and the prospective 
income which results from labor. It must be 
granted, however, that, waiving any general ques- 
tion of the rights of the individual and the duties 
of the state, there are specific provisions in our 
federal and in our state institutions which affect 
the monopolization of insurance by the state. 
The fifth and fourteenth amendments forbid 
the depriving of any person of property without 
due process of law. The fifth amendment states 
further that private property cannot be taken for 
public use without just compensation, and the 
fourteenth amendment forbids any state to deny 

[78] 



STATE LIFE INSURANCE 

to any person within its jurisdiction the equal 
protection of the laws. Again, the federal Con- 
stitution forbids the impairment of the obligation 
of contracts, and provides that citizens of each 
state shall be entitled to all the privileges and im- 
munities of citizens in the several states. What 
troublesome questions might arise under these pro- 
visions or other provisions of the federal Consti- 
tution in the event that a state should endeavor 
to monopolize insurance cannot be predicted. 

The insurance policies are contracts made be- 
tween the company and the citizens of the several 
states. They are contracts extending over long 
periods, and by their number and character estab- 
lish a certain species of income yielding property 
for the officials of the company, at least in the case 
of stock insurance companies. What other ques- 
tions would arise from the provisions of the 
respective state constitutions only an examination 
of state constitutions would disclose. However, 
all these difficulties need not probably prevent the 
state from monopolizing the insurance business. 
For the reason that insurance companies existing 
at the time of monopolization would suffer a 
pecuniary damage, and for the fact that these con- 
stitutions do present difficulties, the better way 

[79] 



INSURANCE AND THE STATE 

would probably be to grant the companies the 
right to maintain their existing insurance, but to 
prevent them, after a certain period, from writing 
new policies. This would give the state an oppor- 
tunity to organize its work and the companies an 
opportunity to adjust their business. 



80 



II 

FIRE INSURANCE 



CHAPTER IV 
THE NATURE OF FIRE INSURANCE 

IT is necessary to inquire into the nature of 
fire insurance, and especially to make a com- 
parison of it with life insurance before the discus- 
sion can proceed to the next topic of investigation, 
viz. is the business of fire insurance one suited to 
transaction by the state ? 

Many mistakes in the regulation of insurance 
have been made by assuming a similarity in the 
character of the various kinds of insurance when 
no such resemblance exists. 

The fire insurance contract is a personal con- 
tract of indemnity. Its personal character is not 
peculiar to it as a contract, since most insurance 
contracts are of this description, but the personal 
factor is to be emphasized somewhat more fully 
in the fire insurance contract, since the one party 
to the contract — the insurer — is, under the 
present methods of conducting the business, very 
dependent upon the utmost good faith being shown 

[83] 



INSURANCE AND THE STATE 

by the other party — the insured. In life insur- 
ance the medical examination can be made search- 
ing and almost all undesirable risks be excluded, 
and therefore the chances of immediate and heavy 
losses be avoided. But in fire insurance the most 
rigid inspection of a building can only tell the 
company what its probable construction and 
exposure hazards are, leaving yet largely unknown 
the important hazard of continued occupancy and 
the moral hazard. Daily inspection cannot be 
made by the company to discover the manner in 
which the insured uses his building, his careful- 
ness, and his honesty in making the contract. 

The fire insurance contract is also one of in- 
demnity ; that is to state, it is one by which the 
owner should receive a sum equal to or at least 
not in excess of the value of the property destroyed. 
It may indeed be less, because the insured has 
chosen to purchase only partial indemnity, but it 
can never, except in case of personal dishonesty 
or ignorantly enacted state laws, be more than the 
value of the property destroyed. In life insurance 
no such indemnity is implied in the contract, for 
the very good reason that life is an immaterial 
thing which lends itself only to very rude calcula- 
tions of its money value. 

[84] 






NATURE OF FIRE INSURANCE 

The value of real estate, and especially personal 
property, is continually changing. The latter 
class of property is suffering depreciation, either 
by use or the continual changes in market condi- 
tions of supply and demand. Therefore even the 
value of the property expressed in the contract 
at the time of writing the policy should not be 
accepted as final in determining the indemnity 
when the loss occurs, notwithstanding that it may 
seem to the insured that he purchased so many 
thousand dollars worth of protection at the time of 
forming the contract. The indemnity should be 
based upon the actual loss suffered, else there will 
be an inducement offered to buy insurance for the 
purpose of a gain, an idea repugnant to the essen- 
tial principles upon which all insurance is based. 
But no such question arises in life insurance. 
The insured purchases the right for his beneficiary 
or for himself to receive a certain stated sum of 
money at death or after a stated interval of time. 
No considerations need be given as to what the 
individual's life is worth. He cannot possibly 
gain from this contract, at least in the sense in 
which gain from an investment is used. It is 
true that fire and life insurance resemble each 
other in that the underlying principle of coopera- 

[851 



INSURANCE AND THE STATE 

tion is the same. This is true in all kinds of real 
insurance. This is but to state that insurance is 
a method of associating groups of individuals 
exposed to a risk whereby a certain degree of cer- 
tainty is secured in place of total uncertainty. 
The groups, by assuming what was formerly an 
individual burden, reduce this burden for each. 
Indeed in fire insurance this cooperation of the 
insured group reduces the burden for the unin- 
sured in that fire insurance, by requiring or at 
least encouraging better methods of construction, 
better protection to property, and more careful 
use of property, reduces the risk of those unin- 
sured. The mere fact that the loss by fire in 
the United States is not being annually reduced is 
no proof, as some contend, that fire insurance 
does not tend to reduce the fire loss. Such a view 
is only slightly more superficial than the related 
one, that fire insurance is a tax. A tax is a com- 
pulsory charge, collected by the state upon all 
property with certain well-known exceptions. 
But the fire insurance charge is not borne by all 
property holders. It is not compulsory. Nor is 
it wholly true that the companies selling fire in- 
surance simply determine the loss by fire and pro- 
rate it among classes of property holders. They 

[861 



NATURE OF FIRE INSURANCE 

are not indifferent as to losses by fire, nor can the 
loss be prorated with the nicety possible in the 
case of a tax. Classes of property show at differ- 
ent times and in different regions great variations 
in the loss ratio, and all classes of property at the 
time of a great conflagration show abnormal losses. 
There arises therefore the question of relative 
risk in fire and life insurance. It has been shown 
that the chief elements of the risk in life insurance 
are found in the mortality rate and the invest- 
ment rate. The burning rate corresponds, so far 
as there is any correspondence, to the mortality 
rate in life insurance. There is, however, greater 
homogeneity among insured lives than among 
insured properties. In life insurance a selection 
of normal lives has been made, and while these 
lives lend themselves to certain classifications on 
the basis of sex and age, and while experience of 
such insured groups shows certain marked varia- 
tions from the assumed rate of mortality, yet there 
is this original selection of normal lives which 
insures a large degree of homogeneity in the group. 
Because the original basis had a large degree of 
uniformity in it, a safe degree of uniformity is 
assured in the result or experience on such lives. 
The risk is not, therefore, from the standpoint of 

[871 



INSURANCE AND THE STATE 

the insurer, great, so far as the mortality rate is 
concerned. 

In fire insurance there are many kinds of prop- 
erty, differing not only as to construction, but 
also to the use to which it is put and the care with 
which it is used as well as to the extent of danger 
of its loss by adjoining properties. Heterogeneity 
rather than homogeneity is the characteristic. 
It is true that a certain selection is made as in life 
insurance, but it is not a selection which secures 
an equal degree of uniformity. A frame drug 
store in an outlying district may be quite as good 
a risk as a brick drug store in a congested district. 
There is not, therefore, possible that selection of 
buildings of the same class and description which 
is possible in life insurance by the medical exam- 
ination. 

A particular class of buildings, as, for example, 
dwelling houses, may even show a favorable re- 
turn for one year in one region and an unfavorable 
result in another region, or the class as a whole 
may show good results for one year and poor 
results for the next year, due to a heavy loss in 
one place. There are also forces in operation 
which tend to produce decided changes in com- 
paratively brief periods of time. The use of new 

[88] 



NATURE OF FIRE INSURANCE 

building materials, the enactment of more strin- 
gent building codes, and the improvement in fire 
protection are but examples of the causes which 
very materially and quickly affect loss ratios on 
different classes of buildings and in different 
regions. 

However great may have been the advances in 
medical science and the discoveries in hygiene 
and sanitation, the effect on insured lives will 
show itself slowly. It is sometimes stated that 
fire insurance differs from life insurance in that the 
former has a rate for each risk, while the latter 
makes rates for classes of individual risks on the 
basis of their age and general physical vigor. This 
is true to a certain extent, as will be shown later 
in detail, but the comparison can easily be pushed 
too far. Schedule rating with its specific charges 
for specific features of the risk has done much to 
individualize fire insurance rates, but there is a 
very definite and desirable limit to the individual- 
izing of fire rates. What is needed most is not 
great individual justice in rates, but greater equity 
in the rates upon classes of property. 

But a more important aspect in the question of 
the relative risk of unexpected loss in fire and life 
insurance arises in connection with the adequacy 

[891 



INSURANCE AND THE STATE 

of rates as a whole rather than with rates on par- 
ticular classes of property. Is there any danger 
that the collections made will not be sufficient to 
meet losses ? Would the state in conducting the 
business of fire insurance have unexpected bur- 
dens placed upon it ? Thus arises the problem of 
conflagrations. It is a well-known fact that this 
country has experienced these enormously large 
losses by fire at different times. They are a risk 
which it seems necessary to provide against at 
least for many years in this country. Statistics 
show that there have been since 1900 eighty-one 
fires in the United States in which the loss was over 
$1,000,000. The total loss of property in these 
fires was $561,375,000, or an annual average of 
$6,930,555. This includes only the large fires. 
The annual fire loss is, of course, considerably 
greater. In no year since 1883 has it been less 
than $100,000,000, and during the past thirty- 
seven years, 1875-1911, it has aggregated $5,337,- 
215,795. Owing chiefly to these conflagrations, the 
capital in fire insurance has been replaced over 
three times since 1871. It was said that the San 
Francisco fire destroyed the profits of fire insur- 
ance in the United States for the past seventy 
years. When these large losses of property occur, 

[90] 



NATURE OF FIRE INSURANCE 

money must be immediately paid out from some 
source to replace the destroyed property. If the 
state is conducting the fire insurance business, 
whether in competition with private companies 
or as a monopoly, this fact will demand large and 
immediate payments by it to those who have suf- 
fered the loss. Thus will be introduced a problem 
of financiering for the state. It must either have 
been accumulating a large surplus from the past 
premiums collected, or it must, by the sale of bonds, 
secure ready money to pay the losses. In the for- 
mer case the state would have been charging such 
rates in excess of current losses as would accumu- 
late this conflagration surplus, and this accumu- 
lated surplus would supposedly be carried as a 
deposit in financial institutions. In the case of a 
proposed sale of bonds, great difficulty and prob- 
ably impossibility would arise. The effect of 
attempting to market by any one state sufficient 
bonds to pay the losses of a San Francisco or 
Baltimore fire would be disastrous, even if there 
were not, as there now are in practically all states, 
certain restrictions upon the issue of state bonds. 
Certain formalities, if not consent of the legislative 
body, would be necessary, and yet the fire losses 
should be paid as quickly as possible. 

[911 



INSURANCE AND THE STATE 

There is nothing in life insurance to correspond 
to the conflagration in fire insurance. To argue 
that plagues establish this correspondence is as 
absurd as to argue that conflagrations are unneces- 
sary. They may not be necessary, but they are 
inevitable so long as our present methods of con- 
struction, fire protection, and legal theory of li- 
ability for loss are continued. 

The risk in fire insurance is therefore quite 
differently affected by the burning rate than the 
risk in life insurance is affected by the mortality 
rate. The burning rate is a more complex factor ; 
it is made up of many incongruous elements which 
but very remotely correspond to the causes of 
death. It is true that there is what is called an 
average annual fire loss, but it is quite a different 
average from the average death loss. The former 
is made up of many fluctuating factors. The latter 
is comparatively stable over long periods of time. 

The second element affecting the risk in fire 
insurance is the investment risk. This corre- 
sponds more closely to the investment risk in life 
insurance, in so far as in both cases advance pay- 
ments are made for a possible loss, and these ad- 
vance collections must be kept securely and 
advantageously invested. The problems arising 



NATURE OF FIRE INSURANCE 

in connection with the investment of the funds in 
both cases are much the same, and the risk ele- 
ment should not in general be greatly different. 
There are, however, points of dissimilarity in the 
financial aspects of life and property insurance. 
The contracts in fire insurance are for much shorter 
periods of time than in life insurance. They usu- 
ally run from one to five years, and this means 
that the general fund is made up of many more 
elements which are continually changing. 

In the case of life insurance the assets, with the 
exception of a nominal capital stock, are the prop- 
erty of the policyholders, and the officials, whether 
of a stock or a mutual company, are very largely 
in the position of trustees of the funds. But in 
fire insurance a larger part of the fund does not 
belong to the policyholders. From one point of 
view it is only the unearned premium reserve 
which belongs to the policyholder, and any policy- 
holder's interest in this reserve ends at the close 
of his contract ; that is, at the end of one to five 
years. It is true that fire insurance companies 
accumulate a surplus to pay unexpected losses, 
as in the case of a conflagration, but to argue that 
a policyholder at a particular time owns a part 
of this surplus which may be used ten years later 

[931 



INSURANCE AND THE STATE 

to pay a conflagration loss when this policyholder 
is no longer a policyholder is stating an argument 
supported neither in law nor morals. 

The officials of a life insurance company are 
expected to invest the funds of the company so 
securely and so safely that the owners of the fund 
may not only be assured that their policies will 
be paid when they mature, but also that they may 
receive either dividends on participating policies 
or low initial costs on non-participating policies. 
Indeed the sum total of life insurance assets is 
not presumed to be divided at any one time among 
the then living policyholders, and the investment 
of these funds so that good returns are secured is 
very important. But the policyholder in a fire 
insurance company can have no great concern 
regarding the earnings upon, the investments of the 
company. He does not expect a dividend unless 
perchance he is a member of a mutual company. 
But these companies do but a small part of the 
fire insurance business at the present time. He 
is chiefly interested in knowing that his loss, if 
it occurs, will be paid by the company. Whether 
this payment comes from the premiums collected 
either with small or large earnings upon them is a 
matter for the officials of the company and the 

[94] 



NATURE OF FIRE INSURANCE 

state and not for him. It is true that competition 
among companies and the laws of the state do 
assure certain earnings for these funds, but the 
policyholder in fire insurance has neither the same 
right to nor interest in the earnings on fire in- 
surance assets as in life insurance assets. 

The business of fire insurance is conducted by 
both mutual and stock companies. In 1911 there 
were 325 domestic and foreign stock companies 
doing business in the United States and 268 
mutual companies. The net premiums collected 
during the year by the former were $225,795,533, 
and by the latter $36,618,986. The total dis- 
bursements of the stock companies were $306,799,- 
882 and of mutual companies $137,418,230. 

The business like life insurance is subject to the 
regulation of the states, with the result that great 
variation in the method of regulating the business 
has resulted. Probably the conflict in state leg- 
islation is greater in the case of fire insurance than 
in life insurance. Fire insurance like life insur- 
ance is essentially mutual in its character, but the 
degree to which mutuality can be applied in its 
actual transaction is limited both by practical 
considerations and theoretical justification. The 
principle of mutuality always implies likeness, and 

[951 



INSURANCE AND THE STATE 

it has been shown that differences are more char- 
acteristic of property for insurance purposes than 
difference among individuals for life insurance. 
In the one case the dissimilarity is a physical 
fact entering into the risk. In the other case es- 
sential dissimilarity has been eliminated by the 
medical selection, and whatever differences remain 
do not materially affect the risk. 

The mutual principle in fire insurance should be 
limited therefore to classes of property which have 
a fair degree of likeness in order to avoid inequity 
in costs. If, for example, the owners of farm 
property and of manufacturing property should 
ally themselves in a mutual fire insurance associa- 
tion, the differences in the character of the prop- 
erty, the use to which it is placed, and the pro- 
tection about it from fire would almost certainly 
assure that one group would be bearing the burdens 
belonging to another. Insurance is one of the 
costs of production, and the consumers of a partic- 
ular commodity should expect to pay all the costs 
of its production rather than to permit its insur- 
ance cost being assessed on other commodities. 
The consumer of bread should not be asked to 
pay a part of the costs of producing patent medi- 
cines. 

[961 



NATURE OF FIRE INSURANCE 

It was thought at one time by many insurance 
officials and agents that classification furnished 
the real solution of the problem of rating. Many 
people who are not versed in insurance matters 
yet believe that rates can be based wholly on the 
classification of losses on different kinds of prop- 
erty and business. Experience has, however, 
proven that classification in itself affords no solu. 
tion to the problem, for its use is limited. It is 
desirable to have the tabulation of losses on dif- 
ferent classes of property ; as, for example, dwell- 
ing houses, sprinklered risks, and mercantile risks, 
and even on classes of property within these gen- 
eral classes. However, it is only the general 
classification which is of great significance in de- 
termining what rates are adequate and equitable. 

In retail or wholesale mercantile risks there are 
a great variety of concerns ; as, for example, retail 
grocery stores, hardware stores, drug stores, and 
likewise a great variety of wholesale establish- 
ments. If it were attempted to make a rate for 
each of these detailed classes, interminable diffi- 
culty would be experienced without any promise 
of equitable or fair rates for the purchaser of in- 
surance. The scientific schedules, such as the 
Dean or Mercantile Schedule, do not attempt to 
e [97] 



INSURANCE AND THE STATE 

make a rate for each class of the above descrip- 
tion, but rather to supply a method of assessing 
the proper charge for each element in the hazard. 
That is to state, these schedules rightly assume 
that a defective flue in a grocery store is quite as 
significant for the rater in producing a fire loss 
as an equally defective flue in a drug store ; that 
a rubber hose connection for a gas fire is quite 
as dangerous in a wholesale dry-goods establish- 
ment as in a wholesale drug house. In other 
words, scientific rating seeks to appraise the hazard 
of the component parts of a risk and assess the 
cost upon each. It does not attempt to classify 
risks endlessly and make a flat charge upon each 
on the basis of the experienced loss. The theory 
underlying the method of establishing the cost of 
indemnity, when a schedule system of rating is 
used, has been well explained by A. F. Dean, the 
author of the Dean Schedule. "Under the theories 
of the Analytic Schedule, — the Dean Schedule- 
rating is not called rating, because as a system it 
does not directly seek to establish the selling price 
of the fire indemnity, but through analysis and 
classification to establish the amount of hazard in 
each risk as compared with other risks. The an- 
alyzed parts of a hazard are the bricks that build 

[98] 



NATURE OF FIRE INSURANCE 

up the total hazard of each risk, and as bricks may 
be used to build any building, so the parts in the 
schedule may build up the estimate of any risk, 
We cannot assume that risks themselves are 
amenable to the law of average without assuming 
that each of the parts are equally amenable to 
average. If each part has its own average, this 
average must stand in a permanent quantitative 
relation to all the other parts. The synthesis 
of parts that establishes the quantity of hazard 
in a risk, establishes at the same time the same 
permanent quantitative relation between the 
hazard of this risk, as compared with all other 
risks, similarly measured, that exists among the 
parts themselves. It matters not what trade name 
a risk bears ; for if its hazard has been measured 
by the same scale of measurement, it stands in a 
position of permanent relativity to other risks, 
regardless of what we may call them. Of the four 
main divisions of fire hazard — protection, struc- 
ture, exposure and occupancy — the last and only 
the last makes the hazard of one property class 
differ from another. The containing building may 
or may not be under municipal protection ; it may 
be of any dimensions or character of material, and 
it may be unexposed or so exposed that exposure 

[991 



INSURANCE AND THE STATE 

constitutes the greater part of its total hazard. 
The basis rate which stands for unanalyzed haz- 
ard does not in theory embody any of the hazard 
of occupancy because it serves as the basis upon 
which the charge for occupancy is superimposed." 



[100] 






CHAPTER V 

SHOULD THE STATE MONOPOLIZE FIRE 
INSURANCE ? 

AFTER this general characterization of fire 
insurance it may now be inquired if it is a 
business suitable for state acjtivity. The inquiry 
may be pursued again on the ground of the pur- 
pose of the assumption of fire insurance by the 
state. Should the state assume it for financial 
reasons, or as a means of securing satisfactory 
regulation, or for the social value resulting ? 

First, then, what would be the justification for 
the state to use the fire insurance business as a 
source of revenue ? This calls for an investiga- 
tion of the profits which stock fire insurance 
companies make, since purely mutual companies 
return all excess collections to their policyholders. 
In 1911 there were 325 stock fire insurance com- 
panies doing business in the United States, with a 
capital of $97,703,288. Their net surplus was 
$217,307,406. The dividends paid were $12,637,- 
272, or 13.9 per cent if calculated for the year on 

[101] 



INSURANCE AND THE STATE 

the capital stock, a result which gives an erroneous 
idea of the actual earnings in the fire insurance 
business, as will be shown later. The above sums 
are impressive and would seem to supply a large 
and promising source of revenue for the state 
treasury. 

Every stock fire insurance company has two 
distinct sources of income. First, the earnings 
from its invested funds, and second, the profits, 
if any, from the sale of its policies. With the 
first source of income our investigation is not 
concerned, since it promises no source of revenue 
for the state. There is no reason to suppose that 
the state would be able to secure a better interest 
return than is now secured by the companies. 
There would, of course, be no capital stock under 
state fire insurance. It may be urged that the 
state could use the funds collected as premiums 
to finance the state ; that is to say, since the collec- 
tions would be in excess of current losses, the state 
might receive the interest on this excess. Doubt- 
less this contention is true, but such a gain can 
scarcely be called a profit or a legitimate source 
of revenue for the state. It is similar to the earn- 
ings on the cash in hand collected by taxation in 
excess of current state needs. This balance does 

[102] 



STATE FIRE INSURANCE 

produce some revenue, but the insurance receipts 
or whatever balance on them was held could not 
be held in the form of cash on hand. The state 
would be forced to invest these funds in securities 
just as the companies now do. The state would 
receive interest on the surplus held for the pur- 
pose of meeting losses, especially conflagration 
losses, since these would be invested. But a limi- 
tation on the character of this investment might 
cause embarrassment. These funds must nec- 
essarily be invested in rapidly convertible cash 
securities, since the demand for these funds in the 
case of a conflagration would be immediate and 
large. It is not in this respect that the state 
would find sufficient warrant for taking over fire 
insurance for the purely financial advantages. 
Such a gain for the state would be trivial. There 
is, however, this second source of revenue, namely, 
the profits which now go to private insurance com- 
panies from the sale of their policies, that is, the 
underwriting profit. 

The total premiums received each year, less 
expenses and payments made for fire losses, con- 
stitute this profit on underwriting, and if such a 
profit exists, a possible source of revenue for the 
state exists, assuming that the patrons of state 

[103] 



INSURANCE AND THE STATE 

fire insurance would be willing to pay in premiums 
such an excess and not insist that they purchase 
their indemnity at cost. 

Statistics show for recent ten-year periods that 
the average loss is about 60 per cent of the total 
premiums and the average expense is about 38 
per cent of the total premiums. The 38 per cent 
is divided into approximately 21 per cent for 
agents' commissions and 17 per cent for salaries, 
rents, and other operating expense. It will be 
observed that underwriting cost hovers very 
closely about total premium collections. In some 
years it exceeds them, and in some companies it 
exceeds them for a number of years. Yet it has 
been stated that the dividends of stock fire in- 
surance companies of 1911 averaged 13.9 per cent. 
Herein lies a paradox which has led to confusion 
in the minds of legislators and prospective in- 
vestors in fire insurance stocks. The percentages 
named in the reports of companies as dividends 
earned are based upon the capital stock and not 
on the indemnity sold. There is a wide disparity 
between the capital stock on which dividends are 
declared and the actual assets which earn these 
dividends. For example, a company may have 
been organized thirty years ago with a capital 

[104 1 



STATE FIRE INSURANCE 

of $200,000 and now have net assets of $2,000,000. 
Many companies do not increase their capital 
stock, but permit whatever underwriting profit 
there is to accumulate as a surplus. They pay 
their annual dividends from the earnings on their 
invested assets. The above company might de- 
clare, for example, a dividend of 100 per cent, but 
this would be 100 per cent on their capital of 
$200,000, which would be but 10 per cent on their 
invested assets. 

The statistics of the National Board of Fire 
Underwriters show that for the decade ending 
Jan. 1, 1900, the average underwriting profit 
was about one third of a cent out of each dollar of 
premiums received, and the same official statistics 
for the years 1898-1910 show the following facts. 
Of 114 companies which received premiums during 
the decade to the amount of $2,346,877,609 there 
was paid out as losses and underwriting expenses 
$2,390,945,059, or a ratio of losses and expenses 
to premiums income of 101.8 per cent. Of the 
one hundred leading companies operating in 1910 
seventy-seven made an underwriting profit and 
twenty-three a loss. 

This, however, proves neither that fire insurance 
is transacted at a loss nor that there would be no 

[105] 



INSURANCE AND THE STATE 

source of revenue for the state, if it should assume 
the business. The above figures do not include 
the earnings from the investments of past pre- 
miums upon which there had been a profit and 
which are now held as a surplus ; nor do they 
include the earnings on the capital stock, al- 
though the earnings on the capital stock should 
not be considered in determining the question 
of profitableness of the fire insurance business 
for the state. This is true because the stock- 
holders might withdraw their capital and invest 
it in other enterprises and secure the normal 
return on capital, and the state would not, 
in case it assumed the business, have any capi- 
tal stock to draw an interest. Again, the sta- 
tistics include the large sums expended as ex- 
pense, and it might be that this expense could be 
reduced under the state's conduct of the business. 
The figures do show, however, that as the business 
is now conducted fire indemnity is sold practically 
at cost ; that is to say, the average annual premium 
receipts for a series of years do not usually exceed 
by a very large sum the average annual liabilities, 
due to the fire loss and the expense of conducting 
the business. The expenses of fire insurance have 
some peculiar characteristics. In the first place, 

[106 1 



STATE FIRE INSURANCE 

it is an expense for the production of a service, 
the total expense of which cannot be known at 
the time of the sale. In the production of most 
commodities the total expense for their produc- 
tion is fairly definitely known in advance, and the 
price of the commodity bears in general a very 
definite relation to the total expenses of produc- 
tion. But in fire insurance the seller of the in- 
demnity does not know at the time of sale what 
it will finally cost him to pay the indemnity. The 
future alone can disclose how much property will 
be burned. For example, a certain company paid 
out last year $94 out of each $100 collected in 
premiums on a certain class of risks which were 
written on a three-year contract. There remains 
$6 out of which to pay the losses of the remaining 
two years of the contract. This is not an espe- 
cially exceptional case nor is it a company which 
carelessly writes business. In the second place, 
fire insurance is conducted as a retail business, and 
therefore it is subject to all the numerous expenses 
of a middleman business. From the local agent 
to the general agent, to a department, and then to 
the home office is a long road with many toll 
takers. In the third place, the expense element is 
affected by so great a number of changing factors 

[1071 



INSURANCE AND THE STATE 

that the past serves as a very imperfect guide 
for the future. 

A brief analysis of fire insurance expenses may 
be given with a view of discovering the possible 
sources of reduction. At the close of 1911 the com- 
panies reporting to the New York Department of 
Insurance showed a total expense item of $116,- 
900,483. Of this total $24,140,938 was paid for 
salaries and wages for home office employees. 
This was approximately an expenditure of 4.4 
per cent on their $535,000,000 assets and .0058 
per cent on the $40,000,000,000 value of the prop- 
erty insured. The losses on investments and 
securities sold during the year were $788,343, and 
for other expenses, excluding commissions, the 
sum of $27,125,528 was paid. These expenses 
include many items, such as rent, advertising, 
traveling expenses, and taxes. Deducting the 
above sums from the total expenses of $116,900,- 
483, there remains $64,842,912 which was paid 
for commissions. It is possible that some saving 
might be effected from a number of the minor items 
of expenses, such as advertising, rents, etc., but 
since no one of these in the aggregate is a very 
large item, the saving on them as a whole could not 
very materially affect the cost of insurances. 

r 108 1 



STATE FIRE INSURANCE 

The three large items in the expense are : (a) 
for salaries, (6) for taxes, and (c) for commissions. 
It is not believed that the officials of fire insurance 
companies as a class are overpaid. There are 
doubtless examples as in any other class of business 
where the officials of the company are paid an 
unduly high salary, but there are no monopolistic 
conditions from which fire insurance officials as a 
class are able to benefit. 

As to taxes, there is a possibility of great saving. 
The report shows that the fire insurance com- 
panies paid in 1911 over $8,000,000 as taxes and 
license fees. If this were reduced to the propor- 
tion which fire insurance companies should pay to 
maintain efficient insurance departments in the 
states, a very considerable saving could be ac- 
complished. There is, however, no immediate 
prospect that taxes will be reduced. Insurance 
companies afford to legislatures in these days of 
increasing state and local expenditures an easy 
and available source of revenue, criteria for taxa- 
tion which have always appealed to the legislator, 
regardless of the essential justice of the tax. 

It is probably the third item, the commissions, 
which will appeal to many as the largest possible 
source of saving. This $64,842,912 for commis- 

[109] 



INSURANCE AND THE STATE 

sion represents somewhat over 12 per cent of the 
assets of the companies and 22.05 per cent on the 
average premium receipt. The Year Book of the 
Spectator Company shows that the average com- 
mission in 1860 was about 11 per cent, in 1890 
about 18 per cent, and in 1900 about 20 per cent. 
The difference in the average commission paid in 
1900 and the present is therefore less than 3 per 
cent. The statistics of the United States Bureau 
of Labor show that the retail price of food in- 
creased 16.1 per cent between the years 1899 and 
1906. This translated into the language of the 
market means that the dollar of the fire insurance 
agent now buys him much less of consumable 
commodities. 

The chief criticism on commissions is not, how- 
ever, that commissions as a whole are too high, but 
that for certain agents and for certain classes of 
risks unnecessary amounts are paid. Mr. S. R. 
Barton, State Auditor of Nebraska, in a recent ad- 
dress shows that over $9,000,000 would have been 
saved during the year 1911 if the graded commis- 
sion plan of the Western Union had been observed. 
It is urged that preferred risks are often a source 
of unnecessarily high commissions as well as a 
source of discrimination. It has also been sug- 

[110] 



STATE FIRE INSURANCE 

gested that agents' commissions be paid only on 
that portion of the premium represented by a 
rate of 1 per cent or less. 

It has been suggested that a general limitation 
be placed on expense. If a law should be passed, 
limiting the amount which could be expended to 
some fixed ratio, as, for example, 35 or 40 per cent, 
the effect would be to retire a number of companies 
and to place a great strain upon a number of other 
companies. However, such a law might achieve 
a very desired end for the buyer of insurance, 
especially if a carefully devised law for regulating 
rates was enacted. 

If the question of a state monopoly of fire 
insurance is considered strictly on the basis of 
its possibilities of yielding a revenue to the state, 
yet another question must be investigated. This 
is the subject of taxation. If financial considera- 
tions alone govern, the state must realize that it 
will lose the revenue now secured by taxation. 
This is not an inconsiderable sum, as is shown by 
the amount of taxes paid by the one hundred and 
eighty companies reporting to the New York 
Insurance Department. This amount in 1911 
aggregated $8,236,529. Viewed as a financial 
problem alone, the state would need to make econ- 

[1111 



INSURANCE AND THE STATE 

omies in the expense of conducting the business, 
which would at least be equal to the taxes received 
in order to avoid a financial loss. It is true that 
the state would receive, as the private companies 
now do, an interest return on whatever surplus 
it would build up, but it must be understood that 
a surplus in the case of state fire insurance would 
arise only from excess annual charges for fire 
indemnity. There would be no capital stock. 
What the capital stock of private companies now 
earn is of no public concern, unless, perchance, it 
be unduly high. The stockholders might with- 
draw their capital in fire insurance and secure the 
normal return in other investments. 

It must be recognized that certain elements in 
the expenses of fire insurance as contrasted with 
life insurance are of a more permanent character 
whether the business be conducted by private 
companies or by the state. Advances in knowl- 
edge concerning insurance and the benefits which 
it has may reduce the cost of persuading people 
to buy both life and fire insurance. But in fire 
insurance the inspection work connected with 
securing a risk and retaining it is quite different 
from the medical examination. A large corps of 
inspectors will be necessary in fire insurance, 

[112] 



STATE FIRE INSURANCE 

not only to examine thoroughly the risk when it 
is written, but also to examine it from time to time, 
either when the policy is renewed or to see that 
proper care is exercised in the use of the property. 
Indeed no other weakness in the fire business at 
present is more productive of evil and inequitable 
results than this absence of adequate inspection. 
Much more should be spent in inspection work 
than is now the case. No other one thing would 
tend so forcefully to reduce the useless fire waste. 
Companies complain that this would largely 
increase the expense, but it is quite probable that 
in time the costs of fire protection would decrease. 
If companies would more readily cancel policies 
when the hazard of occupancy unduly and un- 
necessarily increased on account of careless use 
of the property, and refused to accept risks until 
a careful inspection had been made, losses heavy 
in the aggregate would be avoided, and hence the 
rate would be favorably affected. This practice 
would enforce more careful building and more 
careful use of property. The excuse offered by 
the companies is that competition forces them to 
follow the old policy. It is an expensive kind of 
competition for which the consumer — the prop- 
erty owner — is paying a high price, 
i r 113 1 



INSURANCE AND THE STATE 

A second purpose of the state entering the busi- 
ness might be for the purpose of complete regula- 
tion. This would necessarily involve a state 
monopoly, and the justification of the assumption 
must be decided on the basis of the necessity for 
regulation. The particular reasons for the regu- 
lation of the business by a state monopoly would 
again be, as in the case of life insurance : (a) is 
monopoly threatened under private ownership ? 
(6) is the competition, if it exists, of a kind by 
which the public is injured by unnecessarily high 
or inequitable charges ? (c) is the business of a 
peculiar character which makes regulation diffi- 
cult and unsuccessful ? 

Monopoly would be indicated most clearly 
either by a consolidation of previously competing 
organizations and failure of new competing com- 
panies to be organized or by the evidence of agree- 
ments as to charges by ostensibly competing 
organizations. The Eire Insurance Year Book 
shows that there were 325 stock companies and 
268 mutual companies operating in the United 
States at the close of 1911, and statistics since 
1860 show further that the average number of 
companies for each decade has tended to increase. 
It is a well-known fact that new fire insurance 

[114 1 



STATE FIRE INSURANCE 

companies are frequently organized, although only 
a small per cent of the new companies, especially 
the new stock companies, ever prove a success. 
At the close of 1911 there were 148 fire and fire- 
marine insurance companies in the hands of re- 
ceivers. Practically all the large and markedly 
successful fire insurance companies, whether stock 
or mutual, but especially the former, are compa- 
nies which have been in business for more than a 
decade. These facts might seem to be presump- 
tive evidence of the existence of some kind of 
monopolistic power, but such is not the case. At 
least there is no artificial monopoly power to pre- 
vent the organization and operation of fire in- 
surance companies. 

There are, however, very great obstacles in the 
very character of the business which make the 
chance of new companies succeeding much less 
than for new organizations in most industrial fields. 
This is not because there is any real surplus of 
fire indemnity for sale in respect to the demand. 
In the large centers of population there is, in 
general, a dearth of indemnity for sale. This is 
due to the fact that many companies do not 
write risks in the congested districts and all com- 
panies limit the amount of property which they 

[115] 



INSURANCE AND THE STATE 

will insure in such districts. Then again there is 
much property upon which either no insurance 
or an inadequate amount of insurance is carried. 
In 1911 the one hundred and eight leading fire 
insurance companies had outstanding policies 
which covered $46,276,992,650 of property, but 
this does not represent the market value of all 
insurable property in the United States. 

Nor are the legal requirements regarding the 
formation of a company difficult to meet. Yet the 
net book as well as the market value of practically 
every one of the one hundred and seventy-five 
fire insurance companies is well over the par value 
of the stock. This last fact is to be explained by 
the usually common practice of selling the stock 
of a fire insurance company at a premium in order 
to lay the foundations of that surplus which is 
essential to the success of every fire insurance 
company. 

It is also in connection with this surplus that the 
chief explanation of the frequent failure of new 
companies is to be found. The new company 
has the heavy initial expense of organization ; of 
selling its stock; of securing an agency force. 
It must then go into the field and compete with 
the old-established companies to secure business. 

[1161 



STATE FIRE INSURANCE 

It may find it a difficult matter to secure the better 
class of risks. It may endeavor to secure them by 
cutting rates, but the old established company 
can afford to meet this competitive rate. It 
may offer the inducement to the agent who proba- 
bly represents both companies of a commission 
which will secure the business for it. The old 
company is a going concern and is presumed to be 
efficient, having already secured sufficient business 
to bring whatever economies there are from large 
scale operation. If the new company does secure 
the good risk, it may have been forced to make 
such concessions that a favorable return on the 
risk will not be secured. If it is forced to accept 
the poor risk, it is likewise in an unfavorable 
position to secure a good return. Yet it must 
secure business on such rates that a surplus can 
be gradually accumulated for that time which is 
almost certain to come to every fire insurance com- 
pany when the losses are heavy. This may be 
caused by a heavy loss on several large risks in 
several localities or it may be caused by a destruc- 
tive fire in a particular locality. 

The report of the Superintendent of Insurance 
for New York in 1911 shows that from the time of 
the establishment of the department in 1859 until 

[117] 



INSURANCE AND THE STATE 

the close of the above year 188 stock and mutual 
fire insurance companies had gone out of business. 
Of the 105 companies reporting to that department 
in 1871 only 19 were in business in 1902. Forty- 
six of the companies organized since 1871 had 
retired by 1911. In short, more than three fourths 
of all the companies in business in 1871 had retired 
within the next twenty years and two thirds of all 
those organized since 1871 had retired within the 
next twenty years. Yet new companies are con- 
tinually being formed, and at the close of 1911 
there were in that state 162 fire insurance com- 
panies reporting to the state department of in- 
surance. 

The facts, therefore, do not show that a monop- 
oly exists either from a consolidation of existing 
companies or from a failure of new companies to 
be organized. Whatever limitations exist in the 
latter particular result from the natural obstacles 
to the establishment of a successful fire insurance 
company and not in any artificially established 
restrictions. 

But the evil of a monopoly may occur if ostensi- 
bly competing organizations have agreements 
as to the charges which will be exacted from the 
consumers of the product. What evidence is there 

r us l 



STATE FIRE INSURANCE 

that the charges for fire indemnity are practically 
the same among the independent and competing 
companies ? It may be stated at once that such 
uniformity exists to a very large degree. It may 
also be stated further that there are very good 
reasons for the existence of this uniformity, so far 
as it is determined by the burning rate and not by 
the expense of management and commissions. 
And further that a larger degree of uniformity 
would probably result in an improvement in the 
fire insurance business and ultimately in a lower 
cost of indemnity to property holders. 

This calls for a brief explanation of how the 
rates are determined. This is an unexplainable 
mystery, it would seem, if the laws of several states 
and the complaints of some property holders are 
taken as criteria of the human understanding. 
Yet there is nothing mysterious about fire rates. 
While there is as much reason for difference in the 
premium for fire insurance policies among different 
companies, so far as the expense element of the 
charge is concerned, as there is among producers of 
other commodities, yet so far as the rate is deter- 
mined by the actual loss or burning rate on differ- 
ent kinds of property, there should be no difference. 
No greater number of drug stores insured in one 

[119 1 



INSURANCE AND THE STATE 

company will burn because they are insured in 
that company rather than in another company, 
provided the selection has been well made and the 
risks distributed. It is therefore not the expense 
rate, but the burning rate to which the explanation 
is directed. Why should cost be uniform in all 
companies for this element, and how is this cost 
determined ? 

Each industry, and therefore each class of prop- 
erty, should bear its costs of producing a com- 
modity. Fire insurance is one of the elements in 
the cost of production. Therefore the burning 
rate in each industry should form the proper basis 
for the insurance charge. Under our system of 
state regulation of insurance and the insistence of 
some state legislatures that the burning rate in 
the particular state be taken as the basis, injustice 
may indeed result, because the number of plants 
or producing units may indeed be too few to form 
the basis for a fair average. Mutuality should 
be and must be the elementary principle in all 
insurance, but mutuality must have a sufficiently 
wide basis if it is to be just. But in fire insur- 
ance mutuality must also be restricted; that 
is to say, it should be limited to classes of 
property, but with a wide application within the 

[1201 



STATE FIRE INSURANCE 

class. It is advisable, then, to have a classification 
of property and a record of the losses on each class. 
Nor is the experience of one company sufficient 
to establish the rate, even if its experience extends 
for a long period and over the whole country. 
The combined experience of all companies on all 
classes of property can only afford a satisfactory 
basis for rate making. 

The two systems generally used in this country 
for rating mercantile property are the Universal 
Mercantile Schedule and the Dean Schedule. 
These schedules apply to mercantile property 
which includes by far the most important risks, 
both as to value and number of risks. Other 
schedules are used, but in all of them there is the 
attempt to analyze the elements in a risk on the 
basis of its contribution to losses actual or potential. 
The rating of properties is usually not directly 
done by the insurance companies themselves, but 
by numerous rating bureaus found in all the im- 
portant cities. These bureaus are independent of 
the companies and sell their service to the com- 
panies in the same manner that the makers of fire 
insurance maps do. It is the business of such 
bureaus to inspect properties which they rate and 
to make general surveys of cities for the purpose 

[1211 



INSURANCE AND THE STATE 

of establishing a rating for them, based upon such 
numerous elements as kinds of buildings, water 
systems, and the equipment of fire departments. 
Since their service is sold indiscriminately to all 
companies, there is no reason for them to overrate 
or underrate the risks. These facts, briefly stated, 
account for a large part of the uniformity in the 
rates of all companies so far as this is a uniformity 
determined by the burning rate. In other cases 
and on other classes of property the experience 
of companies forms the basis of the charge. 

There have been many attempts to forbid the 
companies from exchanging their experiences. A 
number of states have passed Anti-Compact laws 
which seek to forbid companies from exchanging 
their experience and agreeing on rates. The intent 
of the framers of these laws has doubtless been 
good, and no doubt unlimited freedom in such 
matters should be restricted. Yet it is certainly 
desirable to have collected experience of such 
companies as a basis upon which to make fair rates. 
What is needed is not a law to prohibit such an 
exchange and such agreements, but to compel 
this exchange of experience and an agreement on 
rates under the supervision of the state. 

The burning rate in fire insurance is a changing 
[122] 



STATE FIRE INSURANCE 

factor, due to the changing character of construc- 
tion material, of building codes, and of improved 
protection. The public has witnessed the com- 
panies changing rates for one reason or another, 
now to a higher plane and now to a lower plane, 
and has immediately concluded that evil designs 
have been made by the companies against them. 
This may have been true in a number of cases, 
but in most cases it has been due only to the chang- 
ing character of the risks. 

The method of rating has been constantly im- 
proved, although no one claims for it perfection. 
Indeed there cannot be any perfect and closed 
rate established; for, as has been shown, the uncer- 
tain factors in the risk are continually changing. 
The most that can be expected or demanded is 
that rates be determined upon property in a 
scientific manner and that equity be secured be- 
tween classes of property insured. In order to 
secure this end there must be available the experi- 
ence of many companies on the different classes 
of risks, and an analysis of these losses made. 

It would then appear that the chief element in 
the cost of fire indemnity, that is, the prime charge 
for property loss and not for expense, should be 
the same for all companies. There might be even 

[123] 



INSURANCE AND THE STATE 

then very good reasons for the enactment of anti- 
compact laws ; but if such were the case, the purpose 
of enacting such laws should be somewhat different 
from that which the states that have such laws 
have had in mind. 

There have been and now are agreements among 
companies as to the commission which a company 
should pay to an agent for securing the business, 
and it would seem that such agreements might be, 
under proper supervision, in the interests of the 
public rather than opposed to public policy as 
many suppose. A favorite device frequently 
employed by recently organized companies to 
secure business has been to offer high rates of 
commission. Rate wars have occurred among 
companies over a particular risk, the risks of a 
city or even a state, and as a result indemnity has 
sometimes been sold at far less than cost. After 
the contest was over rates have been advanced to a 
normal basis. It is not surprising that the public, 
which is not versed in the insurance business, has 
concluded that companies were conspiring against 
them when they have been told that a new policy 
on their property would cost more than the old 
one or when it was announced that rates for the 
city or district had been advanced without any 

[1241 



STATE FIRE INSURANCE 

apparent change in the character of the risks. 
The acts of the companies, quite as much as the 
ignorance of the public concerning insurance, have 
been responsible for the anti-compact laws of the 
various states. It may well be contended that the 
state would be justified in establishing a certain 
maximum of expense, especially in reference to 
the commission, which shall be permitted. If the 
state should establish, for example, 40 per cent as 
the maximum expense which would be permitted, 
this would undoubtedly make it difficult for some 
companies to continue in business and some would 
be forced to retire. But if other companies could 
meet this requirement and if sufficient indemnity 
would be offered for sale, there would seem to be 
no good reason why the public — the state — should 
be forced to subsidize inefficient insurance com- 
panies by permitting such a high rate of expense as 
would make it possible for any group of individuals 
to form an insurance company and continue to do 
business regardless of the rate of expense at which 
the business was transacted. 

If commissions were also limited, this would, 
with the preceding general limitation on expense, 
make it more difficult for new companies to enter 
the field; but again if sufficient indemnity is 

r 125 1 



INSURANCE AND THE STATE 

offered for sale, and if competition is present and 
adequate regulation of rates has been secured, 
there is no reason why the public should be inter- 
ested in having new companies formed. 

The probable effect of such limitations would be 
to encourage the formation of a greater number of 
purely mutual fire insurance organizations and to 
secure the existence of a number of highly success- 
ful and efficient stock companies. Many would 
hold that such a situation would be preferable to 
the past condition with many new stock companies 
being formed, many of which have failed and 
entailed loss to the public both on the insurance 
purchased and the stock held. 

Doubtless many officials of insurance companies 
would agree that commissions for writing the busi- 
ness have frequently been unnecessarily high. 
Agreements have been made and are now in force 
among some companies to regulate the commission 
paid, but it has always been difficult to secure 
cooperation on this subject and adherence to the 
agreement. Some of the older companies have 
refused to cooperate on this subject, and most of 
the new companies have refused to agree on com- 
missions. The refusal is frequently made because 
offering the higher commission was the easiest 

[126] 



STATE FIRE INSURANCE 

method for the new company to secure the risks. 
It is an unfortunate kind of competition for which 
the public has been forced in the last analysis to 
pay. It is the same kind of "cut-throat" com- 
petition which prevailed in the railway business in 
the days when there were no state laws or state 
commissions to regulate rates. 

It is believed that there are even better reasons 
for regulating commissions for selling fire insur- 
ance than for establishing railway rates. Cer- 
tainly the difficulty in determining a fair and just 
price for the service rendered is not so great. 

The companies themselves would still have 
ample opportunity to use their skill, foresight, and 
ability in reducing the other elements in the ex- 
pense, securing better results from their invest- 
ments, and in short so managing the company as to 
secure a profit for the stockholders and perhaps a 
lower charge to the public for the service. That is 
to state, the regulation of commissions, or even the 
total expense, would take away none of the 
important incentives which private business now 
has to secure profit for itself and to produce good 
service for the public. 

To summarize, then, the evidence of monopoly as 
shown by agreements on rates. It is found that 

[127] 



INSURANCE AND THE STATE 

independent rating bureaus do most of the work 
in determining the rates on mercantile risks; 
that schedules for rating are used for certain 
classes of property in which an analysis of the 
elements in the risk is made, and finally that com- 
pulsory compact laws are needed to replace anti- 
compact laws. This would mean that the com- 
panies would be permitted to make their rates on 
the basis of the experience of losses of all com- 
panies on all classes of property under the super- 
vision of the state. 

There remains much to be done in securing 
scientific rates, and especially is greater equity in 
these rates to be desired ; but the absence of these 
desirable ends does not prove the existence or 
danger of a monopoly in the fire insurance busi- 
ness. New companies are being formed. Foreign 
companies are admitted to the various states for 
the purpose of selling fire indemnity. Capital is 
flowing into and out of the business ; for it does not 
take the form of such fixed capital as machinery, 
tools, or factories, which is the case in other indus- 
tries. It retains its mobility. There would seem 
to be no necessity for the state to assume the busi- 
ness of fire insurance simply because the state is 
not now able to regulate it. The states have 

[128] 



STATE FIRE INSURANCE 

ample power in this respect, and whatever injus- 
tices and inequities there are in rates could no 
more easily be corrected by the state's assumption 
of the business than by exercising its wide power 
of regulating the business. 

Indeed there would, under a state monopoly of 
the business, be a very strong inducement for the 
state to use its own experience as a basis for the 
determination of rates, and this geographical unit 
is much less satisfactory than a wider one. In 
fact the state would probably be forced to use such 
a unit, and such a unit is practically unworkable 
with justice to the insured. For example, the per 
capita fire loss in Ohio had fallen to $1.20 in 1911, 
whereas in the United States it was almost $3. 
Would not the people of Ohio insist that the state 
be taken as the unit of area for rate-making pur- 
poses under state insurance ? Any satisfactory 
classification would scarcely be possible, owing 
to the limited number of representatives of an 
industry, unless a combination of risks should be 
made. One state might have but three flouring 
mills, and yet injustice might result if a large group 
of manufacturing plants should be used to form a 
class. Then, again, the loss owing to a conflagra- 
tion in a city would entail a marked increase in rates 

k r 129 1 



INSURANCE AND THE STATE 

for a single state. Consider but a moment the 
cost to the people of California if they were com- 
pelled to meet the losses due to the San Francisco 
earthquake and fire. 

The truth of the matter regarding fire insurance 
rates is that they are very complex and present 
many more difficulties in arriving at and main- 
taining a fair charge than do many other serv- 
ices or commodities. Railway charges, for exam- 
ple, present no such difficulties as do fire insurance 
rates. The former have to do with more station- 
ary elements. 

Would the state be warranted in going into the 
fire insurance business for the purpose of more 
satisfactorily regulating it ? It has been shown 
that the state has complete power of regulation. 
Supreme courts have time and again given expres- 
sion to this fact. For example, the power of the 
legislature to delegate to a commissioner of insur- 
ance the right to deny admission to a foreign com- 
pany or to withdraw the right to do business has 
been upheld. Some states have even gone to the 
extreme point of passing a law under which a 
foreign company forfeited its right to do business 
in the state in the event that it removed to the 
federal court a suit brought against it by a citizen 

[1301 



STATE FIRE INSURANCE 

of the state. Although this would seem to deny 
a right granted by the Constitution of the United 
States, yet such laws for all practical purposes are 
in operation. 

It is not primarily a question of lack of power to 
regulate, but rather a question of how to regulate 
it. The rates may be too high in some cases and 
inequitable in other cases, but, judging by the char- 
acter of legislation frequently enacted, there is 
little hope that the rates under a state monopoly 
would be absolutely just to all classes. As a 
matter of fact no means have been devised to 
secure absolutely scientific rates. If the state 
should discover such a means, it can force the com- 
panies to use it. There will doubtless be greater 
accuracy in determining rates as time goes on, but 
so long as the country is in process of rapidly chang- 
ing its industrial life, so long will the numerous 
changing factors which go to make up fire insur- 
ance rate demand readjustments. That is to 
say, when our cities are built, when our industries 
become organized, and when our business experi- 
ence is systemized, there will be that uniformity 
and standardization of processes and products 
which characterizes a stable industrial life. 
Industrially the country is yet in its infancy, and 

[131] 



INSURANCE AND THE STATE 



the growth to maturity must be accompanied by 
frequent changes and readjustments. 

This is not to state that this coming stability 
will mean the absence of progress and therefore the 
disappearance of changes, but the changes will 
not be of a revolutionary, but of an evolutionary 
character. The readjustments will be more gradual 
and constructive in their character. A standard 
city, a standard building, and a standard fire 
department will then imply more definite things 
in fire insurance than they now do, and therefore 
standard rates will have a greater degree of accu- 
racy in them. 

There yet remains for investigation the third 
suggested reason for the state assuming the busi- 
ness of fire insurance, viz. the social interests which 
the state would be able to serve by assuming the 
business. This question must very largely be 
decided upon the possibility of reducing the fire 
loss or the fire waste under the state. 

The following table shows the fire losses for the 
past 36 years : — 



1912 . 


. . $225,320,900 


1906 . 


. . 459,710,000 


1911 . 


. . 234,337,250 


1905 . 


. . 175,193,800 


1910 . 


. . 234,470,650 


1904 . 


. . 252,554,050 


1909 . 


. . 203,649,200 


1903 . 


. 156,195,700 


1908 . 


. . 238,562,250 


1902 . 


. 149,260,850 


1907 . 


. 215,671,250 


1901 . 


. 164,547,450 



132] 



STATE FIRE INSURANCE 



1900 






. $163,362,250 


1888 






. 110,885,000 


1899 






. 136,772,200 


1887 






120,283,000 


1898 






119,650,500 


1886 






104,924,000 


1897 






, 110,319,650 


1885 






102,818,700 


1896 






. 115,655,500 


1884 






110,008,600 


1895 






129,835,700 


1883 






110,149,000 


1894 






124,246,400 


1882 






84,515,000 


1893 






156,445,875 


1881 






81,280,000 


1892 






151,516,000 


1880 






74,643,400 


1891 






143,764,000 


1879 






77,703,700 


1890 






108,993,700 


1878 






64,315,900 


1889 






123,046,800 


1877 . 






68,265,800 



This aggregates a total of $5,406,666,325 for 
the thirty-six years, or an annual average loss of 
$150,185,175.69. These statistics do not include 
the numerous losses which are never reported and 
upon which no insurance was carried. The statistics 
of the National Board of Fire Underwriters for 1911 
show that the per capita loss for cities of 20,000 and 
over was $2.62, an increase of twenty-three cents 
over 1910. A comparison for the United States as a 
whole shows that more than one third of the total 
loss is borne by one third of the population. The 
statistics also seem to show that as between urban 
and rural communities losses on property under 
the better class of protection have abnormally 
increased, while losses on property with poorer 
protection have grown less. This is a forceful 
commentary on the unpredictable character of 
the fire loss. Comparing the $2.62 per capita 

[133] 



INSURANCE AND THE STATE 

loss in our cities with that in the cities of foreign 
countries the following results are shown. Eleven 
out of twelve of the largest cities in England had a 
per capita loss under one dollar. Belfast in Ireland 
had a loss of ninety-three cents per capita and 
Dublin thirteen cents ; Aberdeen in Scotland had 
a loss of thirty-seven cents and Edinburgh a loss 
of sixty-six cents per capita ; Marseilles in France 
had a loss of $1.27 and Paris a loss of sixty cents ; 
eight of the largest cities in Germany had a per 
capita loss that averaged twenty-three cents ; 
six of the largest cities in Italy had an average per 
capita loss of thirty-one cents ; Moscow in Russia, 
where wood is frequently used, had a per capita 
loss of $1.46 and St. Petersburg ninety -three 
cents. 

No country other than one of such enormous 
natural resources and vigorous population as the 
United States would be able to endure such losses 
by fire, and even in the United States the losses 
have become so great that serious attention must 
soon be given to their reduction. We have had such 
a large fund of natural wealth, and we have be- 
lieved so thoroughly in individual liberty, that we 
have neither felt the need of economy in this 
particular, nor would we probably have been 

[134 1 



STATE FIRE INSURANCE 

willing to circumscribe our personal liberties, 
even if we had recognized the uselessness of much 
of the loss. Timber has been abundant; the 
demand for new buildings has been pressing, and 
the increase in industrial development has been 
so great that any building erected would need 
soon to be replaced. We have preferred to permit 
construction and use under very few limitations. 
Our practice, if not supported by good theory, has 
been to build, to burn, and rebuild and burn, 
rather than to build a permanent building which 
would prove a loss either because it would soon be 
too small or because of the development of another 
section of the city or of another city. 

This fire loss represents an enormous loss of 
social capital. It is a burden on present and 
future generations of which much is unnecessary. 
That there is insurance on the destroyed property 
reduces the burden only in part for the individual. 
The fact that other persons contribute to a fund 
from which the insured receives money to replace 
the destroyed property does not alter the essential 
fact that property has been forever destroyed. 
Yet the losses continue to increase until the prob- 
lem has become one that should demand more 
attention. It is one of the really important 

[135 1 



INSURANCE AND THE STATE 



aspects of the conservation problem of the country. 
It is sometimes offered as an indictment of private 
fire insurance, that this fire loss tends to increase. 
The following table shows the increase in losses 
by decades for the years 1880 to 1910, together 
with the increase in wealth. 



Years 


Increase in 
Wealth 


Per 
Cent 
In- 
crease 


Increase 

in Insurable 

Property 


Per 

Cent 
In- 
crease 


Increase 
in Loss IN 
Property 


Per 

Cent 
In- 
crease 


81-90 
91-00 
01-10 


21,395,091,000 
23,480,215,775 
18,586,905,142 


49 
36 
20 


17,456,482,609 
33,412,378,537 
91,600,352,352 


35.6 
50.4 
90.7 


294,674,675 
898,246,125 


28 
66 



A study of the table shows that the percentage 
of property insured has tended to increase very 
rapidly, so that an increasing proportion of the 
wealth is insured. Unfortunately the table shows 
that during the past decade the percentage of 
increase in the loss of property has been over three 
times the percentage increase in wealth. A desir- 
able condition would be for the percentage in- 
crease of insured property to be greater than the 
percentage increase in wealth, and the percentage 
increase of loss in property to be less than the per- 
centage increase in wealth. 

The questions then arise, are these losses inevi- 
[1361 



STATE FIRE INSURANCE 

table and would they more probably be reduced 
under a system of state insurance than under 
private fire insurance ? One of the determining 
factors in this unusually large fire loss is the fact 
that our buildings are so largely constructed of 
wood. Careless construction and occupancy, 
careless habits on the part of the public, as, for ex- 
ample, in their use of friction matches, ill-advised 
legislation, poor building codes, inadequate fire 
fighting equipment, each contributes to the loss, 
but each of these is more potent in causing the 
loss because our buildings are constructed of 
highly inflammable material. Over 60 per cent 
of our buildings are yet being constructed of wood, 
and so long as it is to the financial interest of an 
individual to build of wood, it will be only a ques- 
tion of how much the loss can be reduced. It is 
not necessary to make a harsh indictment of the 
American people for their materialism in this con- 
nection, for those of the human race who build of 
stone do so because this material is available, and 
therefore it is to their financial interests as indi- 
viduals to do so. Analysis of the causes of fire 
made by a prominent insurance company and 
covering the losses for a period of the past nine 
years in 79,931 fires shows that lightning was 

[1371 



INSURANCE AND THE STATE 

responsible for 8.31 per cent of the losses, incendi- 
ary 4.90 per cent, carelessness 19.44 per cent, 
lighting 14.05 per cent, heating 21.06 per cent, 
vacancy .09 per cent, sparks 4.09 per cent, explo- 
sions, etc., 13.62 per cent, spontaneous combustion 
2.77 per cent, rats and mice 1.30 per cent. 

What do private insurance companies do to re- 
duce this loss ? Have they any interest in its 
reduction or is it their concern simply to assess the 
loss ? Is it true, as is sometimes stated, that their 
interest stops with determining the premium, and 
that they would be interested in keeping the loss 
large, since this would mean more business to be 
transacted ? Any one conversant with the prac- 
tice of fire insurance companies knows that they 
do a vast amount of work which directly tends to 
reduce the fire loss. Not only are inspectors em- 
ployed to investigate risks, but policyholders are 
advised as to methods of improving their risks in 
order to reduce the premium. Many companies 
have public service departments which give sug- 
gestions as to methods of construction which will 
secure a lower insurance rate on the property. 
Policies are canceled in risks when careless use of 
the property is discovered. It is true that much 
more inspection work might be done by the com- 

T 138 1 



STATE FIRE INSURANCE 

panies, but so long as all do not do it, competitive 
conditions prevent single companies from doing 
an unlimited amount of it, lest the cost be reflected 
in a higher rate than their competitors offer. 
Could not the state attack this problem of the 
fire loss with greater prospect of reducing it than 
is likely to occur under any plan of private insur- 
ance ? 

Would the justification be any greater for the 
state to do this in the event that it took over the 
business than that which now exists under a sys- 
tem of private insurance ? To the extent that this 
work would be or is now undertaken, the interest 
and value to its citizens would form the basis for 
such activity. If the state took over the business, 
doubtless much of the work in reducing the unneces- 
sary fire loss could be done in connection with the 
department of insurance. The concentration of 
the inspection work would probably be accom- 
panied by economies over the present method ; for 
there is now under competitive conditions some 
duplication, although the primary inspection and 
rating work, so far as it is done by Rating Bureaus, 
avoids much of the duplication. But the reduc- 
tion of the unnecessary fire loss is not simply a 
question of better inspection work. It is a ques- 

[139 1 



INSURANCE AND THE STATE 

tion partly of carelessness, partly of economic 
interest to the individual in building cheaper and 
more inflammable buildings, and partly of criminal 
acts. The causes therefore cannot be removed 
at once, for there is no mysterious power residing 
in the state by which the moral character and 
economic interests of man can be immediately 
changed. The state can probably do as much in 
reducing this under a system of private insurance 
as under state insurance. Whether the actual 
cost to the public would be less or greater, we have 
no means of deciding. In many states the people 
have already recognized the importance of the 
problem and are working on its solution. A num- 
ber of states have established departments under 
the direction of a Eire Marshal. It is the duty 
of this official to inspect buildings and condemn 
them, and even destroy them if they are not safe 
to use. He may also order improvements to be 
made in buildings and order fire escapes placed on 
buildings. He investigates the causes of fires, 
collects and tabulates fire statistics, issues pam- 
phlets on the subject of causes of fires, methods 
of preventing or controlling them, and in general 
conducts a campaign of public education in fire 
prevention. He also has, as an important duty, 

[140] 



STATE FIRE INSURANCE 

the discovery and prosecution of cases of willful 
destruction of property. This work is already 
showing its results in those states which have 
efficient departments of this character, but the 
work needs to be greatly developed, not only in 
each state now doing it, but each state should 
carry on work of this kind. 

In Ohio the Fire Marshal's office was estab- 
lished in 1900, and a comparative statement of the 
fire losses by years for the decade is as follows : — 



Yeak 


Number of Fires 


Loss 


1901 


7011 


$11,196,789 


1902 


5194 


8,000,000 


1903 


6025 


7,797,995 


1904 


5812 


6,850,578 


1905 


4851 


6,112,707 


1906 


4448 


6,991,111 


1907 


4534 


7,077,702 


1908 


5322 


6,681,703 


1909 


4544 


6,537,061 


1910 


4724 


6,952,320 



There can be no doubt of the social justification 
of the work, and its need would exist even under a 
system of state insurance. It is, however, neces- 
sary that the people who pay for the cost of such 
service, which reflects itself in a lower fire loss, 

f 141 1 



INSURANCE AND THE STATE 

should receive a return in lower premium charges 
on their insured property. This again suggests 
the necessity for a closer supervision of fire rates 
by the state if the system of private insurance is 
continued. 

In connection with this subject of reducing the 
fire loss the valued-policy laws of a number of 
states arise. These laws provide in general that 
the sum named in the policy shall at the time of the 
fire be considered as conclusive evidence of the 
indemnity to be paid. These laws have probably 
raised very materially the cost of insurance, for they 
tempt the dishonest property owner to burn his 
property. Such laws are an incentive to dis- 
honesty first, because they make it advanta- 
geous for the individual to misrepresent facts in 
order to secure insurance in excess of the actual 
value of the property, and second, in making it 
to his advantage to willfully burn his overvalued 
property. 

Legislators have frequently made the mistake 
of placing the whole subject on a personal basis by 
arguing that it was of no one's concern if an indi- 
vidual wished to go into the insurance market and 
to purchase, for example, $6000 worth of insurance. 
But insurance is not sold like potatoes. An insur- 

[142 1 



STATE FIRE INSURANCE 

ance company sells indemnity. An individual 
might buy a bushel of potatoes when he needed 
only a peck without jeopardizing any public inter- 
est or doing an injury to another person, but an 
individual cannot purchase $6000 worth of in- 
demnity on $4000 worth of property without 
doing all other honest buyers of insurance an 
injury. It means that the extra $2000 must be 
donated by the other holders of insurance to 
the individual who suffered a $4000 loss. Yet 
strange as it may seem, valued-policy laws and 
State Fire Marshals are found in the same state. 
Thus the state passes a law to make a thief and 
appoints by law an official to catch the thief. 

The historical background which explains the 
valued-policy law is that in the early history of 
fire insurance the policy was limited in its terms to 
pay losses only to the amount of three fourths 
of the actual loss. But unscrupulous agents en- 
couraged, especially in agricultural communities, 
an overinsurance which at the time of the loss could 
never be collected. The wrong needed to be 
righted, but the remedy was an absurd one. Some- 
thing could be done to reduce the unnecessary fire 
loss by repealing these valued-policy laws and re- 
placing them with laws requiring more careful 

[143] 



INSURANCE AND THE STATE 

inspection of property and more careful use of 
property. 

Another law on the statute books of many states 
which also affects the fire loss is the anti-coinsure 
law. Coinsurance is the plan by which the insured 
agrees to carry a part of the risk in case of a loss 
when the amount insured is not equal to a certain 
percentage of the property's value. It is just as 
important that property be not insured for too 
small a proportion of its value as not to be insured 
for more than its value. Rates cannot be scien- 
tifically and equitably fixed unless there is some 
uniformity in the basis of assessing the cost. 
The present method of determining rates is, as 
has been described, to make each individual risk 
contribute its equitable proportion of the total 
sum collected for loss payments. Each risk is 
credited with its good features and debited with 
its bad ones, thereby encouraging good building 
and occupancy. Suppose now that the rate thus 
determined is 1 per cent on a building worth 
$50,000. This is done upon the assumption that 
the building will be insured for $40,000, or 80 per 
cent of its value, and it will therefore contribute 
$400 to the aggregate sum collected to pay losses. 
If the owner, however, purchases only $20,000 

r 144 1 



STATE FIRE INSURANCE 

worth of indemnity, the contribution to the sum 
for losses will be only $200 and the insurance com- 
pany will be in error in its calculations 50 per 
cent. This 50 per cent error must be made up by 
other policyholders, and consequently the average 
rate which they pay must be increased. The 
point may be made clear by comparing the insur- 
ance rate with a tax rate. Suppose the value of 
the taxable property in a district is $50,000,000 
and the expenses to be met by taxation are 
$1,000,000. If it levies a tax of 2 per cent, this 
sum will be raised. If, however, one fifth of the 
property holders who own $10,000,000 worth of 
the property are permitted to enter their property 
for taxation at $5,000,000 and the 2 per cent tax 
is collected, they will pay only $100,000, whereas 
they should have paid $200,000. The remaining 
property holders must pay the other $100,000 if 
the total sum of $1,000,000 for the community's 
expenses is to be raised. Just as in taxation, where 
it makes no great difference at what per cent of 
valuation the property is assessed, whether 100 per 
cent, 80 per cent, or 50 per cent, so it is uniform on 
all property, so in insurance rating it makes no 
great difference whether the property is valued 
at 100 per cent, 80 per cent, or 50 per cent, so long 
l [ 145 1 



INSURANCE AND THE STATE 

as it is uniform. Owing to the fact that the value 
of property frequently changes, it is the practice to 
base the rate on an 80 per cent valuation ; but any 
other rate would make possible scientific rating. 
For any value above the agreed, the owner is the 
insurer ; that is to state, he is a coinsurer with the 
company. 

In Europe and in marine insurance, coinsurance 
is the rule, and there is scarcely any doubt that a 
system of state insurance would apply the princi- 
ple of coinsurance. The coinsurance principle 
works no hardships on the owner in case either of a 
large or of a small loss if the amount of insurance 
which he carries is equal to or in excess of the per- 
centage of the whole value of the property which 
the coinsurance clause demands. It only becomes 
a factor when there is a partial loss which destroys 
a smaller percentage of the value of the property 
than that agreed upon in the coinsurance clause. 
A repeal then by the states of the valued-policy 
and anti-coinsurance laws and greater supervision 
of rates would do something to bring about greater 
equity in rates and reduce the fire loss. 

This suggests another reason assigned for a 
state monopoly of insurance, viz. to secure greater 
equity in rates. This means that if ideal equity is 

[146] 



STATE FIRE INSURANCE 

to be secured, there will be the complete absence of 
discrimination. Discrimination may occur be- 
tween persons, between places, and between 
classes of property. So soon as one attempts 
to lay down an ideal system of making fire insur- 
ance rates which will be absolutely free from dis- 
crimination, it is very easy to criticize the plan 
both on the basis of theory and practice. It is easy 
to state that each class of property should bear 
its cost of fire indemnity, but there are endless 
problems in the matter of classification as well as in 
determining what the loss and the causes of the 
loss are. Absolute equity as between individuals 
does not exist in any business. The consumer is 
forced to purchase almost daily commodities at a 
price inequitable as compared with the price to 
some other purchases even in the same locality. 
He buys from his corner drug store an article which 
he could have purchased for much less than the 
cost of transportation to another place. His 
groceryman is continually raising and lowering his 
prices on a scale different from that of another 
groceryman in the same city. 

In life insurance the individual pays a charge 
which has been determined previously by the 
mortality experience of those of similar physical 

[1471 



INSURANCE AND THE STATE 

conditions and the same age. But in fire insur- 
ance this charge is continually changing. Annual 
experience of losses on property must be supple- 
mented with good underwriting judgment which 
should be the result of observing and studying past 
experience in order to secure fair fire insurance 
rates. Discriminations of every character cannot 
be removed, but some of them can be reduced. If 
careful analysis of losses on kinds of property is 
made, and if the experience extends over sufficient 
time, regions, and amounts of property, a basis for 
fair rates is supplied. Certainly little excuse 
could then be offered for discrimination between 
persons owning the same kind of property. Like- 
wise discrimination among places on the same class 
of property could not be justified. Discrimina- 
tions among classes of property are doubtless more 
difficult to avoid, but carefully tabulated experi- 
ence of losses would hardly justify the difference 
on certain classes of property which now exists. 
It is in this connection that the state conduct of 
the business would make greatest change, but 
this result might as well be accomplished by the 
state under the present system of private insur- 
ance. It is probably because the public has but 
imperfectly recognized this defect and because 

[148] 



STATE FIRE INSURANCE 

of their general ignorance regarding insurance that 
these numerous examples of misdirected fire insur- 
ance legislation are found. 

If the business of fire insurance is to continue 
under private ownership, it is necessary for those 
interested in it to cease uselessly complaining about 
the burden of insurance legislation and begin a 
campaign of educating the public. The com- 
panies must work out a system of closer coopera- 
tion and bring into the rates greater equity. The 
public is becoming more critical of all business, 
and its criticisms promise to be constructive rather 
than destructive. If competition and cooperation 
among companies cannot result in fair rates, 
there are but two choices. These are rates deter- 
mined by the state for the companies or rates made 
by the state for its own monopoly of insurance. 
There is among insurance officials a disposition 
when the question of rate regulation by the state 
arises to dispose of the whole question by stating 
that it cannot be done. Yet in the case of rail- 
ways it has been done and experiments are now 
being made in what practically amounts to making 
fire rates by the state. If these attempts should 
prove successful, and if private insurance does not 
make improvements both as to greater equity 

[149] 



INSURANCE AND THE STATE 

and in possible reductions in expense, state insur- 
ance may easily be the logical result. 

The people are intrusting more and greater 
activities to the state, and the efficiency of 
government is increasing rapidly. In so far as 
this efficiency is shown by achieved results, 
in so far will the state commend itself to its 
citizens as worthy of being intrusted with new 
activities. 

Some general considerations on the question of a 
state monopoly of fire insurance remain. If the 
insurance is made compulsory, the agency expense 
could doubtless be reduced. Viewed simply as 
an activity of the state for purely social benefit, 
there would seem to be no good reasons why fire 
insurance should not be made compulsory. Prop- 
erty exists and is subjected to the danger of a loss 
by fire, by means of which society is made to 
suffer. The value of the property is comparatively 
easy to determine. Insurance is the only method 
known by means of which the loss can be reduced. 
If a social risk exists and can thus be reduced by a 
well-known method, compulsion by the state for 
the social benefit has good grounds upon which to 
rest. Only the limited number of representatives 
of property in particular classes would be a bar 

[1501 



STATE FIRE INSURANCE 

for a determination of rates quite as accurate as 
and probably more so than those which now exist 
under private insurance. There would, however, 
be no reason why the state could not use the experi- 
ences of losses in other states to aid it in determin- 
ing its rates unless practical politics or local sen- 
timent and prejudice would insist upon a state 
experience of losses for rate making. A con- 
flagration would probably present a difficult 
problem for a system of state insurance. 

The state would accumulate a surplus, but such a 
surplus would not need to be as large as the aggre- 
gate surplus of the private companies. The con- 
centration of the surplus would thus reduce its 
amount and leave in the possession of the public 
a part of the funds now collected. The sums not 
collected under state insurance would remain in 
private hands for productive purposes. It is 
true that the surplus now collected by private com- 
panies is loaned at interest and thus productively 
employed, but it is quite possible that something 
might be gained by permitting the excess to remain 
in the possession of the numerous contributors. 
The surplus collected by the state would also be 
productively employed if it were placed in financial 
institutions and loaned to the private investor. 
[151] 



INSURANCE AND THE STATE 

The particular disposition of this surplus and the 
form it would take would need to be carefully 
worked out. It would need to be in such a form as 
to realize quickly upon it. It might be placed in 
financial institutions which would pay to the state 
an interest upon it, from the interest which the 
financial institution received from loaning it. 
Just as in life insurance so in fire insurance the 
premium paid is spent for management, for com- 
missions and other expenses, and for losses. If the 
first and second elements in the expense can be 
eliminated or reduced, the premium necessary to 
meet losses will be reduced. It is because the 
public is beginning to think that the possibility of 
such reductions exists, and because they think they 
have often not received fair treatment from private 
insurance, that they are agitating the subject of 
state insurance. 

On this subject the words of Mr. Hotchkiss, late 
Superintendent of Insurance in New York, can be 
quoted with approval. "What is needed by our 
people is not submergence of this great institution 
in sovereignty, but the proper coordination of 
insurance and government. Each should do for 
the other only what each can do better than the 
other. In some things — underwriting and adjust- 

[152] 



STATE FIRE INSURANCE 

merit, for instance — insurance by private corpora- 
tions has been eminently successful. These the 
state should, save for helpful supervision, let alone. 
But where corporate initiative has failed, the state 
should coordinate with its creatures. In some 
fields competitive practices prevent rate making 
that is level with economic cost. The temptation 
to withhold too much for salary or overhead 
charge, or to pay too much — of ter far too much 
— for business, is ever present. Hence home 
office disbursements, generally, and commission 
payments are, in some quarters, higher than can 
be justified by the service performed. As results, 
so-called gentlemen's agreements to maintain 
rates thus swollen are branded as trusts, and, 
despite their existence, rate wars are waged 
which profit the few, but postpone that adjust- 
ment of premium charge to economic cost which 
is essential to public satisfaction. 

" While leaving to its insurance corporations all 
technical and specialized functions and making no 
effort, save through proper watchfulness, to inter- 
fere with these factors in the rate charged, will 
not the state in the not distant future coordinate 
with corporate insurance and regulate or limit 
expenses of all kinds ? If it does not, the present 

[153] 



INSURANCE AND THE STATE 

drift toward state insurance seems likely to con- 
tinue. For, whatever be the field, the people will 
not long pay for the insurance of the future more 
than such service is rightly worth." 



[154] 



Ill 

SOCIAL INSURANCE 



CHAPTER VI 
THE NATURE OF SOCIAL INSURANCE 

THE subject of Life and Fire Insurance has 
been considered with respect to the desir- 
ability of making of them a state monopoly, and 
there remains for discussion the subject of social 
insurance. In considering the several kinds of 
Social Insurance it will be necessary to base the 
discussion on the more general aspects and effects 
of such insurance rather than upon a detailed 
examination of its actual accomplishments. This 
is necessary because it is a newer application of 
the insurance principle, and no such scientific 
accuracy is to be found as in the longer established 
forms of life and fire insurance. Then, too, the 
various forms of social insurance are receiving 
great extensions from time to time, which causes 
readjustment of the basis upon which they are 
established. For example, a liability law may be 
replaced by a compensation law : an old age pen- 
sion law may be changed to begin at age 55 in 
the place of age 65. 

[157] 



INSURANCE AND THE STATE 

The term " Social Insurance " in its widest sense 
includes all those applications of the insurance 
principle which protect the social organism against 
all the risks to which it is exposed. It is usually 
applied in a more restricted sense to include only 
those forms of insurance which protect the wage- 
earning class. In this discussion it will be under- 
stood to include Industrial Accident Insurance, 
Old Age and Invalidity Insurance, and Unemploy- 
ment Insurance. The benefits resulting from an 
application of the insurance principle have been 
to a large extent limited to the property-owning 
class. This has been due chiefly to the fact that 
the applications of the insurance principle which 
in the past have been worked out have called, at 
least in the most scientific plans of its applications, 
for periodic payments of stated sums. The great 
masses of people, either because of lack of thrift 
or for reasons over which they have little or no 
control, have not had the sums to make the pay- 
ments. They have, therefore, been forced either 
to depend upon such impracticable plans as as- 
sessments insurance, whose results have been dis- 
appointing, or to such expensive plans as private 
industrial insurance, whose cost has been so high 
that the insured received but a small part of the 

f 1581 



THE NATURE OF SOCIAL INSURANCE 

benefits which the total payments would have 
purchased if the expense of operating the business 
had not been so great. Assessment Insurance by 
its small collections did afford a relief to many, but 
history does not afford an example of any such 
society that has been able to continue as a suc- 
cessful organization. All have had to disappoint 
their members in the end. The numerous five and 
ten cent collections of industrial insurance have 
afforded a burial fund, but the expense of making 
these collections has been so great that the amounts 
left for policyholders made a pathetic commentary 
on the poverty of the poor. 

The name, Social Insurance, is indicative of 
the purpose of such insurance and distinguishes it 
from other forms of insurance in which the private 
or personal interest predominates, in the think- 
ing of the people, over the social interest. That 
such a term has come into general use implies that 
there has been a great development in the feeling 
of human solidarity. The community is begin- 
ning to realize that the burdens of a particular 
class should be borne by the collective strength 
of the community. The idea that the strong 
should assist in bearing the burdens of the weak 
is not only a result of the growth of humanitarian 

[ 159 1 



INSURANCE AND THE STATE 

thinking, but it is also a result of more correct 
thinking upon the problem of what constitutes a 
strong nation and an efficient industrial com- 
munity. It has come to be realized that in order 
to advance the prosperity of a nation, it is neces- 
sary to conserve its productive powers by some 
system of relieving the misfortunes of the deserv- 
ing individual. What becomes to the individual 
a crushing burden is borne lightly by the whole 
community under a system of insurance. The 
underlying basis of social insurance is then neither 
charitable nor individualistic. The more for- 
tunate economic classes, however philanthropi- 
cally minded they may be, are not called upon, 
under a system of social insurance, to relieve an 
individual of his misfortune, but rather to pay the 
just share of what is rightly their costs, both as a 
consumer of goods and as members of the social 
group which must live with and among all other 
members. Therefore these more fortunate eco- 
nomic classes must be as social beings interested 
in whatever benefits other members of the group. 
Nor is the aid given to the individual as such. 
It is not granted on personal grounds. It is given 
because he is a member of the social community 
whose interests are to secure the efficiency in a 

[1601 



THE NATURE OF, SOCIAL INSURANCE 

social sense of every one of its members. Any 
element in the plan of social insurance which has 
a pauperizing effect upon the recipients is to be 
carefully avoided. Society has already paid too 
great a penalty for ill-devised plans of relief. 
The idea of social insurance is not to relieve in- 
dividuals from the personal necessity of providing 
for the ordinary demands of life. His food, his 
clothing, his home, and his family must have his 
individual care, and there remains this adequate 
stimulus for thrift in providing for his ordinary 
wants. It is only for exceptional demands, as in 
case of accident, sickness, old age, and unemploy- 
ment, that society is to be called upon to assist 
in a collective manner the individual to provide 
for his needs. Security from these exceptional 
risks will enable better provisions to be made for 
the ordinary demands upon the individual, and 
the stimulus of saving for these purposes will be 
preserved. 

If such is the general character of Social Insur- 
ance, then the relation of the state to it will be 
somewhat different than to the other forms of 
insurance which have been discussed. That is to 
say, if the term " social " is applicable, it cannot 
be considered a business from which profit should 
m [ 161 1 



INSURANCE AND THE STATE 

be derived to the same degree as is true in the case 
of a purely private business. What is a social 
concern, a social duty, should not be used as a 
source of private revenue. It is proposed, then, 
to examine the particular character of the various 
forms of social insurance with the view of deter- 
mining the relation of the state to such forms of 
insurance. The best known form of insurance of 
this character is Industrial Insurance, but this 
term for our purpose does not refer to the indus- 
trial insurance sold by private companies, which 
was chiefly used to supply a burial fund, but to 
industrial accident insurance or liability insurance. 
The theory underlying liability for payment to 
employees by employers is of very ancient origin, 
but industrial conditions have changed so rapidly 
and so completely that circumstances warranted 
a much more rapid change in the theory than has 
actually occurred. 

Before discussing each of these methods, it is 
important to understand how the evolution of 
industrial society has caused the need of, and the 
demand for, insurance for the wage earners to 
arise. In ancient and medieval times the social 
and industrial organizations precluded the exist- 
ence of insurance for the wage earner. Indeed, 

[1621 



THE NATURE OF SOCIAL INSURANCE 

there was no such class of wage earners as we now 
know them. During the existence of slavery a 
large part of the work was done by this class, and 
as the slave was considered a species of property, 
nothing was owed to him by his employer or 
owner. He cared for him, not so much as a duty, 
but because it was to his economic interest to do 
so. The comparatively simple industrial life of 
the early times gave little value to the life of an 
individual as such. During medieval times the 
feudal system prevailed, and the masses of people, 
although having in many cases comparatively few 
rights, enjoyed protection from their lords. The 
hierarchal form of social organization gave a 
definite status to each member of the social group. 
Later, when the trade and labor classes had freed 
themselves from their dependence, guilds and 
fraternities arose. One of the most important 
purposes of these organizations was to care for 
their members in times of sickness and for the 
deceased member's family in case of death. The 
first classes to secure independence were the com- 
mercial and trade classes of the free cities, and as 
capital developed they assumed gradually a posi- 
tion of greater independence and importance. 
Capital was being accumulated from the ac- 

r 1631 



INSURANCE AND THE STATE 

tivities of the trading and commercial classes. 
The discovery of gold and silver in the new world 
supplied a stock of metals upon which a money 
economy could be established. The age of dis- 
covery opened up new lands for exploitation and 
brought into existence new commodities and new 
markets. The whole industrial world was on the 
eve of a revolution as a result of the accumulated 
capital, the stock of metals, and the new markets. 
This so-called industrial revolution is usually said 
to date from 1785 to 1825, but this period marks 
only the dates between which the transfer to a 
new industrial system was most rapid in England. 
The changes were so very marked that the word 
" revolution " may be applied to this period in 
England, but in other European countries and in 
the United States no such rapid changes occurred. 
It will be more accurate to call the change an 
evolution rather than a revolution and fix the dates 
to include the seventeenth, eighteenth, and the 
first half of the nineteenth centuries, because 
during this period the capitalistic system was fully 
established in the European and American coun- 
tries. The feudal system had disappeared, the 
household or domestic system arose which the 
previous accumulation of capital made possible 

[1641 



THE NATURE OF SOCIAL INSURANCE 

and the new markets made desirable. But the 
most important for our purpose, the status of the 
laborer was radically changed. 

The laborer lost his tool and gained the machine, 
which, on account of its high cost, was beyond the 
powers of his private possession. He lost his 
personal master, and gained the impersonal cor- 
poration. The conditions of labor were now to be 
determined, not by two persons, the laborer and 
his master, but by one person and a thing. The 
laborer gave up the workshop of the home and 
went into the factory. He worked for a money 
wage under a wage contract. He was no longer 
a capitalist and a laborer, but simply a laborer 
selling his only possession — time. In the un- 
precedented demand for goods it is not surprising 
that the capitalistic class were often unmindful of 
the duties which they owed to the laborer as a man. 

We need not rehearse how the humanitarian 
ideas slowly developed and how they gradually 
became expressed in various measures designed 
to protect the wage-earning class ; nor what ef- 
forts were made by the wage earners themselves, 
through the formation of friendly societies and 
trade-unions, to protect themselves ; nor how there 
came to be a labor question and why the neglect 

[165 1 



INSURANCE AND THE STATE 

of the labor class during this period of the indus- 
trial evolution has caused the problem to become 
so acute in the present ; nor how England, because 
she was the farthest developed industrially, began 
to enact laws for the protection of the labor class 
early in the nineteenth century and how other 
nations have followed her example. For our 
purpose it is sufficient to understand that the 
character of the industrial organization of the 
present demands institutions designed particu- 
larly for the industrial classes. 

The relation of laborers to the employers in 
ancient and medieval times was quite different 
from what it has come to be in modern industrial 
times. The factory system was not in existence, 
and the bond of relation between the laborer and 
the employer was closer. The personal relation 
was more definite. In most cases the number of 
employees of one person was limited. The labor- 
ers worked for a person, not for a corporation. 
Out of this relationship of early times there grew 
up a common-law principle of liability of the em- 
ployer to his employees, which, although it did 
not secure full protection to the laborers, yet was 
thought sufficient until late in the nineteenth cen- 
tury, when the common-law principle became ex- 

[1661 



THE NATURE OF SOCIAL INSURANCE 

pressed in statute law. No greater proof of the 
helplessness or disadvantage at which the laborer 
bargains with the capitalist for his wage is to be 
found than in the fact that it was over a century 
after the establishment of the factory system be- 
fore an employer's liability law was enacted. 
Dependence was placed in the operation of the 
common-law principle which had grown up from 
very early times. 

We naturally look for the most definite expres- 
sion of this principle in Roman law. We find 
that the master under this law was not only re- 
sponsible to the servant for any injury suffered by 
the latter when not due to the employee's care- 
lessness, but the master was also subject to lia- 
bility for an injury suffered by a third party as a 
result of the actions of the servant when in the 
employment of the master. It is important to 
understand, however, that as the principle of 
liability developed under Roman and later under 
English law the liability did not rest upon the 
master in the following cases : first, if the person 
injured was a fellow-servant. This is known as 
the fellow-servant doctrine. Second, if the em- 
ployee knew or had means of knowing the dangers 
incident to the employment and voluntarily 

[167] 



INSURANCE AND THE STATE 

accepted the employment. This is known as the 
assumed risk doctrine. Third, if the injury re- 
sulted from the combined negligence of employer 
and employee, that is, the latter contributed to 
the negligence which resulted in his injury. This 
is known as the contributory negligence doctrine. 

It is important to understand these limitations 
or exceptions, because practically all the legislation 
and all the court decisions since this far-distant 
date, so far as they have given greater protection 
to the employees, have done so by modifying or 
doing away with these limitations. This is the 
goal from which we have started, and the goal to 
which we go is to assess upon society in some 
manner the total costs of production; to secure 
for the laborer, not only an adequate daily wage, 
but also protection against accident, however 
caused, against sickness, unemployment, invalidity, 
and old age. Not until then will many agree that 
an equitable system of distribution has been de- 
vised, for the burden now resting upon the shoul- 
ders of the laborer is not all his own. 

Without tracing the changes in the conditions 
of work and the changes which occurred in the 
industrial organization after the establishment of 
the factory system, it may at once be stated that 

[1681 



THE NATURE OF SOCIAL INSURANCE 

as a result of these changes England passed an 
employer's liability law in 1880. England was 
the most advanced industrial nation, and this 
fact, together with the character of its people and 
government, accounts for this law. The most 
surprising fact about the law is that its enactment 
was so long delayed both in Europe and in 
America. 

In the United States the development of the 
idea of the obligation on society to bear the cost 
of industrial accidents has been slow in gaining 
acceptance. This has been due in part to the 
character of the industrial life and in part to the 
prevailing individualistic philosophy, which has 
very naturally received expression in our consti- 
tutions and laws. Industrially the country has 
been very largely agricultural, and the opportunity 
for free enterprise has been very great. There 
was a large amount of free land, and the worker 
had a choice of occupations. But as cities began 
to grow into great industrial centers, with all the 
concomitant problems of the factory system, a 
relationship of employer and employee arose, for 
which the old individualistic philosophy did not 
provide. Industrial accidents became numerous, 
and yet the right of free contract, the rights of 

[169 1 



INSURANCE AND THE STATE 

private property, and other guarantees of the in- 
dividualistic philosophy embodied in constitu- 
tions and laws, prevented a just assumption of 
what was a social burden. To state that wage 
earners are receiving a higher wage than formerly 
is not pertinent to the question, any more than to 
state that they are thriftless. Even if these 
statements are true, the question is, have wage 
earners shared equitably in the increased progress 
of the century, and are sufficient opportunities 
and inducements present to make them provident ? 
The heavy burdens which they have borne as a 
result of accidents in their employment have 
resulted not simply because they were working for 
a wage for themselves, but also because they were 
producing commodities for society. In the second 
place the opportunity to own land or homes or 
the tools of production is very largely absent, and 
a powerful incentive to save is therefore absent. 
Whenever the result of saving can express itself in 
a tangible form, the inducement to save, especially 
to the less well educated, is very strong. The in- 
definite need for an old age which many may 
never experience, and which is far distant for all, 
the opportunity for an advanced education whose 
benefits are generally unknown because experi- 

[170] 



THE NATURE OF SOCIAL INSURANCE 

enced by but few, the opportunity for leisure, 
which they do not know how to use because of the 
necessity of daily and continuous labor, these, 
and many other causes, have all been responsible 
for the absence of thrift among the laboring class, 
and have prevented them from adequately sharing 
in the wonderful progress of the past century. 

There is, however, evidence of a great awakening 
among the people of the United States in regard 
to their duties to the wage-earning population. 
This is due in part to the great development of 
humanitarian thinking, and in part due to the 
gradual growth of class consciousness among wage 
earners, which has expressed itself in unified de- 
mands upon the public to be relieved of some of 
the burdens of society which the laborers have 
been carrying. For our purpose this demand 
has taken the form of an insistence that the old 
theory of employer's liability should be changed 
to meet the changed industrial conditions. There 
is but little justification under our present indus- 
trial organization for an insistence upon the old 
doctrines of assumed risk, fellow-servant, or con- 
tributory negligence, however deeply imbedded 
they are in laws and court decisions. In some 
states these doctrines have practically been abol- 

[1711 



j 



INSURANCE AND THE STATE 

ished, and hence arises the need of distinguishing 
between the Employer's Liability principle and 
the Compensation principle. 

The first principle has to do with the circum- 
stances under which an employee could receive 
damages from his employer because the employer 
was made by law responsible for injuries received. 
This was, as has been shown, based upon the in- 
dividualistic philosophy of the rights of property, 
of free competition, and contract. The second 
principle has to do with the compensation given 
either directly by the state or enforced by a law 
upon the employer to grant compensation for all 
injuries received while engaged in the services of an 
employer. It is true that the second principle 
may exclude certain industries, as, for example, 
agriculture or employers of a limited number of 
workmen, but the idea underlying the principle 
is to recognize that the large per cent of injuries 
received in industrial employment are not pri- 
marily due to the fault of the worker ; that they 
are a just part of the costs of production, and 
society which uses the product should pay all its 
costs of production. If a workman in walking 
across a perfectly smooth factory floor should 
stumble and fall into a machine and as a result 

[172] 



THE NATURE OF SOCIAL INSURANCE 

be under the necessity of having an arm amputated, 
he might not under a liability principle receive 
any damages from his employer, but under the 
compensation principle he would be indemnified 
on the ground that such accidents are possible 
to a workman, and that the loss should fall neither 
upon the employee nor the employer, but upon so- 
ciety for whom the product was being produced. 
The compensation principle is thus more inclusive 
than the liability principle, and its general adop- 
tion is probably only a question of a few years in 
those civilized countries where it is now partly 
in force. 



173 



CHAPTER VII 

SHOULD THE STATE MONOPOLIZE 
SOCIAL INSURANCE? 

THE chief subject of the investigation is thus 
reached in the question, what instrumental- 
ity should be used to apply this principle ? Should 
it be the state or private companies under the 
supervision of the state ? It is well, in attempting 
an answer to this question, to investigate briefly 
the means which have been used to secure pro- 
tection to the working classes from industrial 
accidents and sickness. One of the earliest meth- 
ods of securing this protection, and one that has 
continued to the present time, is that whereby 
the employees formed among themselves purely 
mutual associations. When an accident or any 
other misfortune occurred, payments were made 
or aid rendered to the suffering worker by his as- 
sociates. These mutual associations have been 
formed for various purposes and on various bases. 
Sometimes a stated sum without reference to the 

[174] 



STATE SOCIAL INSURANCE 

wage received was paid by each. Out of this, cer- 
tain sums were paid during sickness or upon death. 
In other cases the collections and payments 
were adjusted to the wage received. Whatever 
the basis, the characteristic of all these asso- 
ciations was their mutuality. It was a volun- 
tary association of workers usually employed in 
the same industry. They were not formed in 
response to any liability law of the state, but were 
simple expressions of the recognition on the part 
of the wage earners of their class interests. As a 
class they suffered certain misfortunes as a result 
of their employment, and they took this means of 
aiding each other. These societies exist in large 
numbers at present, and any plan of social insur- 
ance which does not take their existence into 
consideration and offer encouragement to their 
continuance and their improvement to a more 
scientific basis is likely to do a great social injury. 
These voluntary organizations would form, be- 
cause they are voluntary and not compulsory, a 
means by which great social and industrial effi- 
ciency can be secured for this class of the popu- 
lation. They exist as a nucleus around which may 
gather many forces for growth. The state is a 
mysterious force for good only in so far as it works 

[175] 



INSURANCE AND THE STATE 

through the people who compose it,, and social 
improvement cannot result from merely passing 
compulsory laws and attaching penalties for their 
disobedience, but rather by offering stimulus to 
desirable voluntary forces and organizations which 
spring out of the life and the experience of its 
citizens. 

As the principle of liability of the employer to 
the worker became extended and better expressed 
in laws, private insurance organizations were 
formed which sold to the employer protection 
against claims made by the worker under the lia- 
bility laws. This may be called public voluntary 
liability insurance. That is to state, the law estab- 
lished the liability, and the employer voluntarily 
purchased the protection of a private company 
which was formed to protect him against any 
suits which were entered by the workman for dam- 
ages as a result of an industrial accident. These 
private companies established their charge or 
premium on the basis of the risks of the industry 
and the accidents in the particular plant. That 
is to state, the number of accidents in the industry 
and in the particular plant of the employer were 
the fundamental factors which determined the 
cost of the insurance or protection from damage 

[1761 



STATE SOCIAL INSURANCE 

suits for the particular employer. When a suit 
was entered by the workman, it was a matter of 
concern for the insurance company and not for 
the employer. The latter simply reported the 
facts to the insurance company, which either 
effected a settlement with the injured workman 
before a suit for damages was instituted and tried, 
or defended the case before the court and paid 
whatever damages were granted. This method 
of assuming liability under the law has come into 
very general use during the past thirty years. It 
has adaptability from the viewpoint of both em- 
ployers and the insurance companies to any type 
of a liability or even a compensation law. The 
extent to which it has been satisfactory to the 
workingmen will be discussed later. 

In addition to the above methods of securing 
protection to the working class another method 
has been developed of late years. This is the 
Relief Association, as exemplified in the associa- 
tions of a number of important railway companies 
and large industrial organizations, such as the 
United States Steel Company and the Interna- 
tional Harvester Company. These Relief Asso- 
ciations differ somewhat in the particulars of 
their organization and operation, but the purpose 

n r 177 1 



INSURANCE AND THE STATE 

is largely the same. Not only is the worker 
granted aid in time of sickness and accident, but 
usually a pension is paid after a certain age, or 
in case of total disability, or to his family in case 
of death. The employee usually shares with the 
employer the cost of the service, although the latter 
may pay a large part or all of it in a few cases. 
Membership in the association is voluntary for 
the employee. The relief is adjusted to the wage 
received, and the systems in practically all cases 
have been carefully devised and operated. 

Before passing to a consideration of the com- 
pensation principle it is well to note that the vol- 
untary principle has been very largely the rule 
until the past several years. That is to state, the 
employer and the employee were permitted to take 
whatever means they chose to protect themselves 
against industrial sickness and accidents. The 
employees might ally themselves in mutual or- 
ganizations; the employers could buy their lia- 
bility protection from a private company selling 
such protection. Even when it was found that 
a considerable number of accidents was due to 
the nature of the industry itself and the demand 
arose that the industry, that is, the employer, 
be made liable for them, there was no attempt to 

[1781 



STATE SOCIAL INSURANCE 

dictate the manner in which this liability should 
be met. In other words the employer's liability 
principle as a legal principle had reached its 
limit. It was soon found, however, from practical 
results, that the condition of the employee had 
been but little improved. Liability in law had 
been established. The legal problem had been 
solved, but the social problem remained. The 
workman, it was found, could receive damages 
at law only after long delays and heavy expenses, 
which often absorbed a great part of the damages 
which were awarded. Suits were contested, and 
too often the success in resisting claims measured 
the excellence of the insurance company from the 
standpoint of the employer. At the close of 1911 
the statistics of the Liability Companies reporting 
to the Massachusetts Department of Insurance 
showed that these companies had outstanding 
14,227 suits. 

For each of the preceding five years the suits 
unsettled for the year were as follows : 3394 suits 
unsettled for the year 1911; 5559 suits for 1910 
unsettled; 2684 suits for 1909 unsettled; 1206 
suits from 1908 unsettled; and 618 suits from 
1907 unsettled. It is true that neither the total 
number of suits unsettled nor the suits of any one 

[179] 



INSURANCE AND THE STATE 

year are a large percentage of the total claims 
paid or the total claims in force for the year. But 
it is not in this fact that the chief significance lies. 
The real importance consists in this fact : that 
many workmen were injured and the indemnity 
belonging to them from some one was being with- 
held. They and their families needed to be sup- 
ported in some manner from some source. Not 
the number of workmen injured in an industry 
has been the real measure of charges to the em- 
ployer by the insurance company, but the amount 
of the claims which they were forced to pay con- 
stituted essentially the determinant of the pre- 
mium. In a system, then, under which both the 
company and the employer had an advantage to 
gain from preventing the employee from securing 
indemnity, the results secured for the working- 
man were not large. Investigations made with 
some considerable care seem to warrant the state- 
ment that the workman has secured actually 
less than one third of the indemnity granted by 
the courts. What per cent he has secured of 
what he really should have secured as the result 
of an injury suffered through no fault of his own 
is certainly much less. Even under the best 
liability laws many injured workmen have either 

[1801 



STATE SOCIAL INSURANCE 

received nothing or have been persuaded to ac- 
cept pathetically small amounts, or if the court 
has awarded damages, a large part of it has been 
taken to pay the costs of prosecuting the claim. 

It is not then surprising that a demand arose 
to replace the indefinite liability laws under which 
the intended beneficiary — the workman — re- 
ceived so little, with a definite compensation law 
under which specific sums were to be paid upon 
the happening of certain industrial accidents. 
Such laws, by specifying the indemnity to be paid, 
avoid the necessity of numerous trials at law to 
fix either the responsibility for the injury or the 
amount to be paid. This introduces necessarily 
the system of compulsory insurance, but it does 
not follow that there need be compulsory organi- 
zation. That is to state, the compensation may 
be established by law in great detail, and yet the 
employer might be left to make whatever arrange- 
ment he chose to meet the costs of paying the 
compensation. 

That the insurance should be compulsory, how- 
ever provided for, rests chiefly upon two points. 
First, the experience of the past seems to show 
that the workingman has not been able to se- 
cure protection against risks which were under- 

[1811 



INSURANCE AND THE STATE 

taken in the production of goods for society. 
Second, for whatever reasons, the facts show that 
he has not provided a fund from his earnings to 
care for himself and his family during the time 
that he has suffered from these accidents. Society 
therefore finds a large number of its members de- 
pendant upon it for certain periods, during which 
times they are either insufficiently cared for or are 
the subjects of forms of relief which in neither case 
tend to increase their social and industrial ef- 
ficiency. Wage earners have neither the prudence 
nor the income to provide such insurance, nor have 
they the power to enforce employers to pay for it 
in the form of a higher wage. The insurance pro- 
vided in compensation laws is therefore so thor- 
oughly social and the practical results under a 
voluntary system of liability insurance have been 
so disappointing, that both on grounds of theory 
and practice it should be compulsory. The move- 
ment for compulsory insurance of this character 
has been realized in many European countries 
and is being adopted in the states of this country. 
The important questions thus are, should this 
form of insurance be made not only compulsory, 
but should it also be made the subject of a state 
monopoly ? 

[182] 



STATE SOCIAL INSURANCE 

Most of the important European countries have 
made this form of insurance compulsory, and it 
would seem that the character of the insurance 
and the class to which it refers make compulsion 
the only possible working basis. The object of 
such insurance is to bring its benefits to those 
who need it most, but so long as it is voluntary 
the class which needs it most is not likely to 
secure it. It is true that certain classes, such as 
the paupers, the physically and mentally deficient, 
cannot be reached by such insurance, but the 
problem arising in connection with them is for 
philanthropy, for industrial education, and eu- 
genics. The compulsion in the case of social 
insurance of this kind is merely to secure a form 
of social cooperation and cannot be considered 
an odious exercise of sovereignty. The wage 
earners have not protected themselves against 
the industrial risks. This may have been due to 
lack of means, ability to save, foresight, or a 
number of other causes, and only a plan of com- 
pulsion seems adequate for the work to be done. 

If the state establishes a monopoly, it must be 
either to secure adequate regulation or for social- 
developmental purposes, and not with the hope of 
securing from such a monopoly any financial 

[1831 



INSURANCE AND THE STATE 

return. Little justification could be found in the 
principles of state financiering for using this in- 
surance as a source of revenue for the state. The 
wage earners as a class have little property to bear 
a tax, and their wages are far removed from that 
point which is supposed to justify a tax. The 
employer who directly pays the premium neces- 
sary to purchase this industrial insurance should 
not be required to pay more than the cost of the 
service, since a good system of taxation will levy 
a tax upon all his property. The accidents which 
occur in his plant are incurred in producing goods 
for social consumption, and his outlay should be 
limited to the costs of the materials and labor. 
Society could have nothing to gain by charging 
itself more than the full cost of making the indus- 
trial goods and thus use this insurance as a source 
of profit. Therefore no one of the three possible 
sources of a revenue can be used to make a profit 
for the state under a monopoly of this insurance. 
The wage earner whom the insurance is primarily 
intended to benefit cannot be used as a source 
of profit if a system should be desired of making 
him pay its costs ; for a profit of this character 
would tend to defeat the very purpose of the in- 
surance. The employer should not be used as a 

[184 J 



STATE SOCIAL INSURANCE 

source of profit for the state since he is under a 
just system of taxation already contributing his 
share to the state's revenue. Lastly, society or 
the consumers of the product should not be used 
as a means of securing a profit, for this would be but 
taking money out of one pocket and placing it in 
another. Consumers should pay the full costs of 
producing the product, but not more than this. 
Other more direct and equitable methods of secur- 
ing revenue to the state are available. 

It may be urged, however, that it is for purposes 
of satisfactorily regulating the business that a 
state monopoly is desirable. This assumes that 
the results desired under a compensation law are 
difficult to secure under a system of state regula- 
tion of private insurance. That is to state, that 
even when the particular compensation is fixed 
by law, the results to the wage earner are not so 
good as when the law is administered and operated 
by the state. There is, in fact, no lack of statute 
power to regulate the private companies which 
would sell insurance under a compensation law. 
A state is supreme in the matter of regulating 
insurance transactions within the state. The 
particular regulations may not accomplish their 
purpose, but this is not due to a lack of power to 

[185] 



INSURANCE AND THE STATE 

regulate, but either to a lack of knowledge of how 
to regulate or to the peculiar character of the sub- 
ject regulated. Complaint has been made in 
some states where compensation laws are in force 
that the private companies which sold the insur- 
ance protection increased the rates as compared 
with those in other states. But the state can 
regulate the rates or enforce rates of its own mak- 
ing. It is not because of any lack of constitutional 
power to regulate the private companies that a 
state monopoly should be urged, but rather for 
a number of other reasons which now demand 
consideration. 

It is argued that private companies have, on the 
basis of their conduct of liability insurance, for- 
feited any right to claim that they can furnish 
the insurance under a compensation law either 
economically or equitably. The expenses of op- 
erating such companies in the United States have 
been shown to be about fifty per cent of the re- 
ceipts, excluding profits to stockholders, while in 
Germany, where the state largely administers the 
law, such expenses are as low as 14.1 per cent of 
the receipts. The enormous expenses now paid 
for commission, salaries, and advertising would, it 
is claimed, be saved under a state monopoly. 

[186] 



STATE SOCIAL INSURANCE 

It is again pointed out that competition often 
results in discrimination in rates. The large 
employer, it is claimed, has always been able to 
secure more favorable rates than the small one 
after all fair allowance for the difference in writing 
and operating the business has been made. It is 
said that discrimination often occurs between the 
producers in different states. Rates are juggled 
to meet competition at one place or another. It 
is said dishonesty is prevalent among agents in 
rating risks, and that this is countenanced by the 
officials of the company as a necessary means of 
getting business under the conditions of competi- 
tion. 

Again it is pointed out that the private com- 
panies have never succeeded in forming associa- 
tions to exchange experience from which really 
scientific rates could be made. Readjustments 
of rates to get the business have been more often 
the rule rather than rates based upon actual ex- 
perience of losses. 

It is also argued that under the private system 
there has not been the proper inducement given 
to improve the working condition of the plant; 
that is to say, the employer has had little induce- 
ment to install protective devices for his workmen 

[1871 



INSURANCE AND THE STATE 

because lie knew that if the liability company at- 
tempted to raise his rates, another company would 
write his business either at the old rate or at a 
lower one. It is also urged that under a private 
system the compensation principle is likely not 
to be as satisfactory, owing to the fact that the 
worker will be forced to deal with his employer 
and a stranger whom his past experience has 
taught him to believe are not interested in secur- 
ing justice for him, whereas he would feel that the 
state had no interests other than justice to serve. 
The private companies under the liability principle 
certainly have not earned great credit to them- 
selves either for the economical use of the funds 
which they received or for their zeal in endeavor- 
ing to see that the injured worker secured the 
indemnity. Indeed it was not to be expected 
under the old system of liability that the insur- 
ance company should serve the workingmen. 
The company was paid a price to relieve the em- 
ployer of the liability, and the company was the 
servant of the employer to protect him from the 
workman. The company could not at the same 
time be a protector to the employer against his 
workmen and a preserver of the interests of the 
workmen. Whatever the theory of liability in- 

[188] 



STATE SOCIAL INSURANCE 

surance has been, in its actual working, the private 
company has resisted the claims of the wage 
earner against the employer. It is therefore 
claimed that the interest of society in the work- 
men can be best served under such a state mo- 
nopoly of the business. 

It is true that the theory of compensation laws 
is that the costs of the insurance will be ultimately 
borne by the consumers of the product, and hence 
the important social interest of having a minimum 
cost in transacting the insurance. There are, how- 
ever, some difficulties in a complete acceptance of 
the theory that the consumer will in every case 
bear all the costs of compensations for the injured 
workman. It is assumed that it is immaterial to 
the employer, or even to the private insurance 
company, what compensation is established, since 
each will but add it to the cost of producing the 
commodity, or the cost of the insurance and then 
collect it from the consumer. But is it always 
possible to shift completely this added cost? If 
a uniform compensation law for the whole 
country was adopted, such a shifting would un- 
doubtedly be more possible. It may, however, 
happen that this increased cost of production may 
be the deciding factor in the competition between 

r 1891 



INSURANCE AND THE STATE 

two producers in different states, having either 
different compensation laws, or where one has a 
compensation law and the other a liability law. 
The cost of this insurance, which may be con- 
sidered as a tax in discussing its incidence, is as- 
sumed to be a tax on consumption, and like all 
such taxes of this character its final incidence is 
difficult to determine. It has been pointed out 
that while a tax or charge of this character can 
be added to the price of one or more articles, yet 
such a tax on all commodities cannot raise the 
price of all articles. If this added charge in cost 
of the insurance be applied indiscriminately under 
competitive conditions to producers in the United 
States, the possibility of its shifting to consumers 
would be much greater than by a system under 
which only a part of the competitive producers 
would be assessed the cost of such insurance. 
The enacted and proposed compensation laws ap- 
ply only to certain states, and even in the states 
which have such laws there are certain differences 
in the law. Many other states have no such 
laws, and judging from the general absence of 
uniformity in the legislation of the various states, 
and especially in the social legislation, this differ- 
ence is likely to continue in the legislation for 

[1901 



STATE SOCIAL INSURANCE 

the protection of the wage earner. It is therefore 
not at all certain that the producer who im- 
mediately pays the cost of the insurance will be 
able, as the theory of such insurance assumes, to 
shift the tax or the cost of the insurance to the 
consumer in the form of a higher price for the 
commodity. The consumer is frequently, in these 
days of developed transportation facilities, in- 
terstate markets, and interstate business organ- 
izations, under no necessity to purchase the prod- 
uct from a producer within his state. Indeed 
it is the exception for a producer to derive his 
articles of consumption from the state of his resi- 
dence. The day of local markets has passed. 
When green vegetables and perishable goods of 
all descriptions are transported hundreds of miles 
to markets, the local producer finds his only im- 
portant control of the local market in his control 
over price. 

There are but three sources from which the cost 
of the insurance can be paid, viz. from the profits 
of the producer, from the wages of the employee, 
and from the consumer in the form of a higher 
price. If the cost is taken from wages, the very 
purpose of the insurance will be counteracted, 
since the purpose of such insurance is to bring 
[1911 



INSURANCE AND THE STATE 

about an improvement in the condition of the 
wage earner. 

It remains then to discuss the conditions under 
which the cost might be taken from the profits 
or from the price to the consumer. This calls for 
an examination of the conditions of production 
both as to the prevalence of competition or mo- 
nopoly and also as to conditions of production; 
that is, whether it is subject to the laws of constant, 
decreasing, or increasing cost as well as to the 
nature of the demand, whether elastic or inelastic. 
The possibility and desirability of shifting the 
tax will be determined both by the conditions of 
cost under which it is produced and the character 
of the demand. That is to state, it may be pro- 
duced under conditions of constant, decreasing, 
or increasing cost, and the demand for it may be 
elastic or inelastic. The simplest case is that 
where each unit is produced at a uniform cost; 
that is, the expenses of production neither in- 
crease nor decrease greatly as the number of units 
produced is increased or decreased. Producer 
A in state X, where there is a compensation law, 
would normally seek to shift the cost of the in- 
surance to the consumer, but his competitor B in 
state Y, which either has no compensation law 

[1921 



STATE SOCIAL INSURANCE 

or one levying a lower charge, might be able to 
supply the consumers of A with the commodity 
at A's old price. A would then be forced to pay 
the cost of the insurance from profits or attempt to 
take it from wages. If A has been enjoying large 
profits, which means that competition has not 
been freely working, he may pay the cost and yet 
continue to do a profitable business. The second 
case is when the commodity is produced under 
conditions of increasing cost. Normally a tax 
on consumption under this condition does not, in 
strict theory, raise the price by the full amount of 
the tax, since a rise in price can only come with a 
decline in quantity produced, because a lower- 
ing in quantity produced means a lowering of 
the margin of cultivation or a lowering of the 
marginal cost. If, then, the cost is added to the 
former price, and the demand is so elastic that a 
smaller number of units are produced, the tax 
or cost added is counteracted in part by the de- 
creased pressure on the source of supply. If 
producer A in state X then attempts to add the 
cost of the insurance to his former price, his com- 
petitor B in state Y may secure a part of his 
market, since A can only afford to add the cost 
to the normal price of the article by reducing the 
o [ 193 1 



INSURANCE AND THE STATE 

units he produces and thus securing the economies 
which come by lowering the marginal cost. Un- 
der these circumstances an incentive would be 
given to small-scale production. 

In the case where cost is subject to conditions 
of increasing returns, a tax on consumption may in 
strict theory raise the price by the amount of the 
tax or even more. This is primarily due to the 
fact that the rise in price checks consumption 
under a condition of little elasticity of the demand ; 
the supply is reduced and the cost per unit is 
increased, since under the hypothesis an increase 
in the units produced was accompanied by a de- 
creased cost of production per unit. If, however, 
the demand is very inelastic, a condition not 
usually found in the case of articles produced 
under conditions of increasing returns, the tax or 
the cost of the insurance might be added to the 
price of the product. However, it is necessary 
to consider the competitor B in state Y, who is 
not compelled to increase his price. If A attempts 
to add the cost to the price of the article, B has 
very great inducements to offer A's patrons the 
article at the old price, since an increase in the 
units he produces, under the hypothesis, brings 
a decrease in the cost per unit. This would be 

[194 1 



STATE SOCIAL INSURANCE 

true if the demand for the article was elastic, and 
B might stimulate its increased consumption by 
offering it at a lower price than A's old price, since 
he has already secured economies through the 
greater number of units produced by selling to 
A's old customers. Under such circumstances 
a powerful stimulus would be given to develop 
large-scale production in state Y by the laws of 
state X. 

There remains the condition of monopoly in 
production to investigate. If the producer A in 
X is not subject to competition, but enjoys a 
monopoly or semi-monopoly, he is in greater con- 
trol of price. As a monopolist he is presumed to 
have so adjusted his price as to yield him the maxi- 
mum profit. A tax on monopoly profits cannot 
be shifted, but the cost of the insurance cannot be 
viewed as a tax on monopoly profits. It is as- 
sumed that it will be added to the price and borne 
by the consumer. Will it be to the interest of the 
monopolist to do this ? If the demand is elastic 
and a rise in price from the addition of the cost of 
the insurance causes a decline in the units consumed, 
the monopolist may be quite willing to bear a part 
or all of the tax. This would especially be true 
if the monopolist was producing the article under 

r 1951 



INSURANCE AND THE STATE 

conditions of increasing returns. If the demand 
is inelastic and the addition of the cost of the 
insurance to the price does not result in a decreased 
demand, the monopolist is likely to shift the cost 
to the producer. If he is producing under condi- 
tions of decreasing returns, he may be quite willing 
to add the price and accept a reduction in demand, 
since this may lessen costs for him. If the monop- 
oly is of a public character, the force of a custom- 
ary price and the power of the state over the 
rates or prices of the service may prevent the 
monopolist from increasing his price in order 
to shift the cost of the insurance, as the theory 
assumes all producers will do. However, too great 
refinement in analysis should be avoided in at- 
tempting to determine the bearer of the cost of 
this insurance. In this discussion the existence 
of the competitive producer B in Y state is the 
significant factor. It is assumed that he is free 
from this insurance charge, and this difference in 
his favor always exists as an immediate advantage, 
whatever the conditions of production and what- 
ever the character of the demand. 

The possibility of securing increased efficiency of 
the laborer, and therefore lowering the ultimate 
costs, must be considered in connection with this 

[1961 



STATE SOCIAL INSURANCE 

increased cost of production and the cost of living 
for the laborer. Yet the workman is not a con- 
sumer to the same extent as he is a producer in 
this particular. However, the increased efficiency 
would show itself only after a time and could 
hardly be expected to apply only to a state which 
had the particular compensation law. If the laws 
were uniform for the whole country, the argument 
of increased efficiency would more forcefully apply, 
but so long as there would be difference in such 
laws, it is difficult to understand how chaos and 
confusion in costs of production can be avoided. 
It may be argued that the existence of a good 
compensation law would attract a high grade of 
laborers to that state, and hence greater efficiency 
would be secured, because the employer could 
select his laborers. But labor is scarcely so 
mobile as to secure that result, and even if it was, 
the state would have the problem of dealing with 
the large number of inefficient who were left over 
after the assumed selective process had been com- 
pleted. A state would have no power to apply 
a protective tariff labor policy by which to protect 
its producers. The United States might wisely 
use the protection principle in this connection if 
a uniform compensation law was enacted. The 

[197] 



INSURANCE AND THE STATE 

argument that the costs of compensation can be 
immediately shifted is somewhat superficial and 
fallacious when a careful analysis of the organiza- 
tion of production and distribution of goods is 
made. Goods are cheaply and quickly shipped 
long distance under our efficient system of inter- 
state transportation. 

It may be replied that the state can save enough 
by making a monopoly of the business to meet the 
difference in costs of production between a pro- 
ducer in that state and one in a state which does 
not have a compensation law. If the state makes 
the law not only compulsory, but also makes insur- 
ance in the state department compulsory, doubtless 
a considerable saving can be effected in agency and 
operating expense. It is also true that under a 
good compensation law employers would be re- 
lieved from paying out large sums for special 
funds, hospitals, gifts to people in distress, and 
charitable institutions. This might well happen 
to a certain extent, but it is questionable whether 
it is desirable for the state to discount the phil- 
anthropic motives of its citizens, if it establishes 
such a monopoly for purely social purposes. It is 
also argued that the enactment of such a law, 
particularly if the state operates the law under a 

[1981 



STATE SOCIAL INSURANCE 

department of state, will bring great improve- 
ments in the relation of employer and employee; 
that labor trouble will be decreased and the inter- 
est of the employee in his work will be stimulated. 
In short that efficiency will be greatly increased. 
Undoubtedly the old system of liability insurance 
in its practical working has done much to embitter 
the wage earner against his employer and society, 
but the real labor problem is too fundamental to 
be solved by any such temporary and trivial 
remedy. 

It is proposed under a state monopoly to furnish 
the protection to the employer at cost, but how- 
ever great the difference between that cost and the 
cost under a system of compulsory state compensa- 
tion under private companies, the essential diffi- 
culty arises between the production cost to an 
employer in one state as compared to the pro- 
duction cost of a competing employer in another 
state. If one is to judge from the experience of 
the states which have enacted social legislation 
in the past, it would be easy to conclude not only 
that all states will in the near future not enact a 
compensation law, but also that if the advantage 
seems to be with those states which do not have 
such stringent laws, indefinite postponement will 

[199 1 



INSURANCE AND THE STATE 

occur. However desirable it might be to have a 
national consciousness on social questions, the 
selfish and local interest of a community will 
long be sufficiently strong to prevent the enact- 
ment of legislation which will result in increased 
national efficiency. State lines are real divisions 
when industrial and social legislation is considered, 
and in the matter of workingmen's insurance 
for industrial accidents they present the great- 
est single problem. The theoretical justification 
of the insurance, its social gains, and national 
economic value can scarcely be doubted, but its 
practical application by the different states pre- 
sents difficult problems. The problems chiefly 
center around the question of rates and the loca- 
tion of the costs. Does a state afford a sufficient 
basis for equitable and fair rate making, or in other 
words are there sufficient representatives of the 
various industries to make the accident experi- 
ence in the state representative for the industry as 
a whole ? In the second place, will it be possible 
for the employer who directly pays the cost of 
such insurance to shift it to his consumers, who 
are neither as a class residents of the state nor are 
compelled to buy his products ? It is a social cost, 
or a consumer's cost, which, under a system of 

[200] 



STATE SOCIAL INSURANCE 

single state insurance, will be difficult to shift to 
him. It is peculiarly a kind of insurance suitable 
for state conduct, since its benefits go directly to 
a very large class of the population and indirectly 
are shared in by all of the population. Every 
employer has been collecting from the public 
sums sufficient to pay the cost of his liability 
insurance as an overhead expense of operation. 
He certainly has not consciously and willingly 
foregone so much of his profit, and it is not to be 
assumed under the prevailing conditions of com- 
petition among similar producers that he has been 
able to take this element of the expense from the 
wages of the worker. In addition to this cost of 
legal liability the employer may have been paying 
out certain sums to his workmen in case of sick- 
ness; that is, he may have continued the wages 
during the time of sickness or during the accident. 
He may also have been a liberal contributor to 
various organizations and funds for the benefit 
of the wage-earning class. A compensation law 
relieves him from many of these charges, and this 
is especially true, it is claimed, when the law is 
administered by the state. 

In discussing or comparing costs of liability in- 
surance or compensation insurance under private 

[2011 



INSURANCE AND THE STATE 

companies to the employer, with the costs of com- 
pensation insurance under the state, costs must be 
considered from a broad basis. 

In the first place, the employer is relieved from 
paying a charge to a private company which 
must expect to secure a profit on the business 
transacted. In the second place, the compensa- 
tion under the state takes care of the many cases 
which formerly caused the employer to make a 
contribution although no legal liability was in- 
curred. In the third place, the employer is given 
every inducement to improve the working condi- 
tions of his plant in a manner that will reduce the 
number of accidents, since his rate of charge is based 
in part upon the injury experience of his plant. 
The total sums paid for direct compensation may 
thus be made to approach what he formerly paid 
for liability insurance. In the fourth place, the 
relatives of the injured workman, as well as mis- 
cellaneous persons, are relieved from the money 
expenditure which was made in such cases to care 
for the injured worker. In the fifth place, society 
is assured that the workman will receive proper 
care when an injury occurs, and that he will be 
returned in many cases to his work, whereas he 
formerly became a charge upon society for many 

[202 1 



STATE SOCIAL INSURANCE 

years because he did not have proper care at the 
time of the injury. 

In the sixth place, there is good reason to assume 
that fewer workmen will be injured, since under a 
good compensation law, and especially if it is 
administered by the state, the employer, the em- 
ployee, and society are each interested in reducing 
accidents. Some support to this contention is 
claimed from the experience in Ohio. The acci- 
dent record of those employers insured with the 
state under the compensation law was in 1912 one 
accident for each two and one half million dollars 
of pay roll, while those employers not so insured 
had one accident for each seven hundred and 
fifty thousand dollars of pay roll. It should be 
stated, however, that those insured with the state 
were probably the better risks. The law had not 
been in force sufficiently long to make great 
changes in the conditions of the plants, but because 
a premium was placed upon plants with good work- 
ing conditions by a low rate the state secured the 
better plants. 

Finally, it may be pointed out, that under a com- 
pensation law administered by the state, the large 
sums spent in legal proceedings would be saved. 
From the purely social viewpoint, which, must 

[2031 



INSURANCE AND THE STATE 

be emphasized in discussing workmen's insurance, 
these legal expenditures represent waste. Al- 
though it does not seem to be an astounding state- 
ment to state that when the worker is injured, he 
is injured, yet the procedure in the past after such 
injuries have been suffered shows that the truth 
of the statement has not been accepted. Never- 
theless, the social significance of the fact is that 
one of the members of society is disabled, and 
further that he should have immediate care instead 
of having a long drawn-out court proceeding to 
determine if he was injured and who is to blame 
for the injury. 

The cost of compensation might therefore be 
much greater than liability insurance and yet be 
cheaper. Even the immediate cost to the em- 
ployer might be greater than the former cost of 
his liability insurance, and yet in a series of years 
be cheaper to him in dollars and cents. 

It is often urged by those opposed to extending 
the functions of the state that all the good results 
of workingmen's compensation legislation can be 
secured by permitting the employer to purchase 
this insurance from private companies. Many 
favor the principle of compensation but oppose 
the plan of having the state provide the protection. 

[204 1 



STATE SOCIAL INSURANCE 

It is urged that this is an unnecessary interference 
with private business; that inefficiency in con- 
ducting the work will result from the assumed 
fact that the administrators of the law will be 
influenced by practical politics ; that the cost of 
transacting the business will therefore be very 
great and more than equal whatever profit the 
private company would secure. 

On the other hand it is contended that work- 
men's compensation insurance furnished by private 
companies would afford an opportunity or excuse 
for the private company to exact a high charge; 
that there would be no means of limiting the 
profit of such companies or in limiting the charge ; 
that competition would not afford a safe protection 
because one result of such competition would be a 
"cutting" of rates by the private companies as a 
means of securing the business, as has often been 
the case in private liability insurance; that the 
result of this would be that the adjusters of the 
companies would attempt to settle claims for less 
than the sum provided in the compensation law 
in order to secure a profit for the company which 
had been jeopardized by writing the business at 
an unprofitable rate. In other words it is urged 
that the private company, and almost equally the 

[2051 



INSURANCE AND THE STATE 

employer, would have the same inducement to 
keep the workman from securing his award under 
a compensation law by private companies as they 
had under a system of employer's liability insur- 
ance. 

The state, in order to prevent this result, 
would be compelled to employ a large number of 
inspectors to secure the intended operation of 
the law. 

Neither private liability insurance companies 
nor employers can be criticized for the past 
conditions under which the employee received 
so little indemnity in the event of an industrial 
accident. The insurance company was employed 
by the employer. It was his servant against the 
employee. It did what it was paid to do, and the 
less it paid out, the less the employer was forced 
to pay in. Nor is it true that neither the private 
insurance company nor the employers ever did 
anything to aid and protect employees, but 
it is true that the contract made between them 
was a purely business contract, made for the two 
parties interested in it — the company and the 
employer. 

But under a system of compensation by the 
state, it is claimed that no individual, company, 

[206] 



STATE SOCIAL INSURANCE 

class, or group has anything to gain in attempting 
to prevent the injured workman from securing 
indemnity for the accident. It is manifest that 
experience alone can prove or disprove many of 
these contentions. 



[207 



CHAPTER VIII 

THE RELATION OF THE STATE TO SICK- 
NESS, OLD AGE, AND UNEMPLOY- 
MENT INSURANCE 

IT is, however, not only industrial accidents to 
which the wage earner is exposed, but also 
to the contingencies of sickness, old age, and 
unemployment. The question arises as to the 
extent to which the state should protect him 
against these risks. 

It is probable that sickness carries with it much 
greater loss to society than do industrial accidents. 
Sickness means not only a temporary loss of em- 
ployment for many workers, and hence the loss of a 
productive force for society, but it also means that 
this sickness may so undermine physical vitality 
that either the individual's life is shortened or he 
becomes a charge on society during many years of 
later life. The social interest in preventing sick- 
ness and in devising means of distributing the loss 
which it entails is evident. In the United States 

[2081 



SOCIAL INSURANCE 

it is estimated that about 3,000,000 persons are 
seriously ill all the time, and of this number 900,000 
are males fifteen years of age and over. If the 
insurance principle is to be used to protect against 
this contingency of illness by action of the state, 
there is the choice between a voluntary and a 
compulsory method. 

An objection always urged against any action 
on the part of the state in this particular is that 
sickness is a strictly personal matter, and therefore 
should be provided for by the individual. Several 
replies may be made to this contention. In the 
first place many wage earners do not receive a 
wage from which a surplus is left, after providing 
the necessities, to purchase the protection against 
sickness. In the second place, even if the wage 
does make such a surplus possible, many of them, 
from lack of thrift and imagination, would not 
voluntarily provide for sickness. In their self- 
confidence they think the period of sickness is too 
indefinite and will befall some other wage earner. 
In the third place, society now provides for the 
wage earner in times of sickness, however moder- 
ate and insufficient the provision may be. Hence 
a charge is now borne. While the risk of sickness 
exists, yet this risk for the wage earner is more 



INSURANCE AND THE STATE 

definitely connected with his work, and he is 
more helpless in preventing it. Many are forced 
to work under unsanitary surroundings. They 
are exposed in the crowded quarters to infectious 
diseases. Their food is often unwholesome and 
their clothing often insufficient. But a distinc- 
tion, however slight in many cases, must be made 
between the obligation of wage earners to pro- 
vide sickness and industrial accident insurance. 
The latter is clearly a social charge which should 
not in any part be borne by the wage earner 
except as a consumer. Society is not, however, 
so completely responsible for sickness, since it does 
not have complete control over its causes. Then, 
too, society must be greatly interested in encourag- 
ing and stimulating all its members to live more 
hygienically, to adopt habits of clean and whole- 
some living, and to become thrifty. These stimuli 
may in part be supplied by compelling the wage 
earner to pay a part of the cost of sickness insur- 
ance. There would also seem good reasons, both 
on the ground of theory and economy, to make it 
a state monopoly. Certainly it is a source from 
which private individuals should not be permitted 
to take profit. Yet the collections or payments for 
the insurance would need to be made by the state 

[210] 



SOCIAL INSURANCE 

through the employer from the wage of the em- 
ployee. As a matter of practical administration 
the insurance against sickness for wage earners 
can easily and economically be applied in connec- 
tion with the industrial accident insurance. It 
is, in fact, a part of social insurance which is not 
easily separated from industrial accident insur- 
ance. The employer, as in Germany, might also 
be assessed a part of the cost and the remainder 
be contributed directly by the state from general 
taxation, since the prevention of illness is a sub- 
ject of general concern. Yet the same practical 
objection to its application by a state would arise 
as in the case of the industrial accident insurance. 
There would be the same difficulty of shifting the 
costs from the producer to the consumer, although 
the necessity to do so would not be as great as in 
the accident insurance, since the particular state 
might very directly benefit from a plan of sickness 
insurance applied only in the state. However, 
confusion would almost certainly result from the 
diverse plans of the various states, which differ- 
ently affected costs to the producers. The oppor- 
tunities for economy in applying the insurance 
plan through a state monopoly rather than by 
private companies would be as great as in indus- 

[211] 



INSURANCE AND THE STATE 

trial accident insurance. The savings in agency 
expense under a state monopoly of compulsory 
sickness insurance would probably be large, as 
well as the savings from overhead expense of 
operation. Some difficulty might arise in the 
determination of rates, since the amount of sick- 
ness is a function of age, constitution of the popula- 
tion, climatic conditions, and character of the in- 
dustrial life. That is to state, the cost in one 
state as compared with another might be much 
higher per capita, and the state might not afford 
a proper basis for the determination of rates. 
The problem of old-age insurance has been 
well stated by G. W. Squiers in his book on 
" Old Age Dependency " in the following words : 
"Actuaries tell us that out of one thousand men 
living at the age of twenty, five hundred will still 
be living at the age of sixty-five. Economists and 
statisticians tell us that of the living at the age of 
sixty-five, two hundred will be in want and that 
eight ninths of all the pauperism in the country is 
among people who have passed the age of sixty- 
five." The essential social and economical prob- 
lem arising is not what shall be done with this 
large number of dependent old, but what can the 
state do to reduce the number who become depend- 

[2121 



SOCIAL INSURANCE 

ent. Neither the public almshouse nor private 
charity correct the condition. They only relieve 
the situation. Shall the state institute a system 
of old-age pensions to prevent these large num- 
bers from reaching the age of destitution when 
they become a burden to the state ? Should it 
establish a system of self-maintenance in old age 
from the contributions on the part of the industrial 
worker ? Thus arise the two plans. One, a 
system in which the state makes the full contribu- 
tion, and the other in which the small annual 
contributions are made by the wage earner during 
his productive years. The theory of the first 
plan is that the wage earner does not receive a full 
return for his labor under the competitive wage 
system, and society in his old age pays him this 
difference in the form of an old-age pension. It is 
given, not as a matter of charity, but as a payment 
for service rendered during the productive years. 
It is a deferred and contingent additional compen- 
sation for past services. In the second plan, it 
is said that whatever pretense is made that the 
pension is a payment for services rendered, the 
real effect is to discount thrift on the part of the 
wage earner and make him the recipient of a char- 
ity which injures his self-respect, and by producing 
[2131 



INSURANCE AND THE STATE 

a feeling of parasiteship, greatly reduces his poten- 
tial social and economic efficiency. Yet, however 
desirable it may be for the wage earner to set aside 
a fund for old age, the actual realization of such a 
thing is impossible for many. Whether this is a 
result of lack of thrift or a result of receiving 
an unjust wage is immaterial for the purpose of 
discussing the place of the state in a system of old- 
age insurance. 

The system of providing such insurance presents 
no difficulty from an actuarial standpoint, and 
hence the state need not hesitate to assume the 
business for this reason. The number reaching 
a certain age can be accurately determined as well 
as the sum necessary to be collected to pay the old- 
age pensions. Nor need there be much doubt that 
the state could transact the business at a greater 
economy than private companies, if it were made 
compulsory. Nor is there any doubt of the social 
value of old-age insurance. The Massachusetts 
Commission of 1910, which investigated the sub- 
ject, estimated that the cost in that year of main- 
taining the dependents of sixty-five and over would 
be for the United States $178,899,968. For 
Massachusetts alone it would be $6,180,406. 
The sum which would be required under a state 

[214] 



SOCIAL INSURANCE 

old-age pension scheme would depend upon the 
character of the law, as to eligibility, the amount 
paid, and the age constitution of the population of 
the state. Some very practical difficulties might 
arise in the application of a scheme of state com- 
pulsory old-age pensions. First, as to the source 
of the funds to pay the pensions. Should a period 
of residence be required, and if so, how long ? Un- 
less this were true, would not a state be burdened 
with a large number of the aged from the other 
states ? If the state does not pay the total cost, 
should it be assessed upon employers in part and 
in part on the employees ? Would an employer be 
able to shift to the consumer of his product the cost 
of this contribution if other states did not have 
a similar law ? Might he not be forced to take 
from profits, if they existed, or be induced to try 
to get it from wages ? If the employee contrib- 
utes, what becomes of his contribution when he 
removes to another state ? Would his wage be 
sufficient to make the contribution ? Would he 
be willing to permit it to be taken from his 
weekly wage, when in an adjoining state he 
could receive his full wage to use as he pleased ? 
These and many other practical difficulties would 
need to be solved before the states in the United 
[215 1 



INSURANCE AND THE STATE 

States could enter upon a plan of old-age insur- 
ance. 

The subject of Unemployment Insurance by the 
state introduces a problem differing very greatly 
from that considered in the previous forms of 
insurance. The appeal made to the socially 
minded is equally as strong for unemployment 
insurance as in the other cases, but the solution 
of the problem is infinitely more difficult. In- 
stances of no work for the willing worker appeal 
strongly to our sympathy. To have a dependent 
family with no opportunity to earn a wage to 
support them is a hardship. Society is interested 
in having the worker earn his wage, not only to 
escape the burden of supporting him and his de- 
pendents, but also because of the indefinite but 
none the less powerful effect which it has upon 
social and industrial efficiency. But does a 
system of unemployment insurance afford the 
remedy ? This calls for a brief reexamination of 
the insurance principle. Among the several req- 
uisites for an application of the insurance prin- 
ciple the following are pertinent to our discussion. 
There must be a risk which appeals to those inter- 
ested as being worth providing against. To this 
risk large numbers must be exposed. The risk must 

[2161 



SOCIAL INSURANCE 

be capable of being calculated with some degree of 
certainty. The nature of the risk must be clearly 
specified. In neither of the last two particulars 
does unemployment fulfill the conditions. The 
statistics of unemployment are not sufficiently 
accurate to base a scientific system of insurance 
upon them, and unemployment itself can neither 
be accurately specified nor its amounts calculated 
on account of the various conditions of unemploy- 
ment and the numerous uncontrollable forces 
which produce it. It is impossible to state what 
work each is able to do, or what work he should 
do and under what circumstances he should be 
forced to work in case of unemployment. Unem- 
ployment may be due to the workman's fault; 
it may be due to a strike or a lockout in the plant 
in which he works, or in a related plant or an indus- 
try. It may be due to industrial depressions or 
financial stringency, the occurrence of which can- 
not be predicted. It may be due to such chance 
elements as war, climate, or fires. Scientific 
insurance can only be applied when the initial 
risk is calculable and its future degree is also 
known to an accurate extent. Whatever plans 
are in practice among trade-unions and other 
organizations are not based on any scientific insur- 

[217 J 



INSURANCE AND THE STATE 

ance principles. They are but mutual agree- 
ments to pay certain sums in cases of unemploy- 
ment, without any reference to the particular 
source of the funds or their recipients. Another 
objection to unemployment as a plan of social 
improvement is that it is not essentially a method 
of correcting an economic and social evil, but is 
simply a method of relief. Unemployment in 
itself is an evidence of a defective economic organ- 
ization. Relief may frequently tend to weaken 
the recipient of it. 

A distinction must be made between assist- 
ance to the unemployed and unemployment insur- 
ance. The insurance plan, if it is placed in opera- 
tion, gives a legal right to the assistance, while the 
former is based upon an expectation of relief 
from a purely mutual or social arrangement. In- 
surance could not be based upon the caprice of the 
human will, and yet unemployment might arise 
from this source. A worker might stop work, not 
because of unsatisfactory wages, long hours, 
unsanitary surroundings, but on account of the 
personal character of his employer. He might 
join with his fellow-workmen in a strike to secure 
justifiable improvements in wages or conditions 
of work. He might strike while working, and the 

[2181 



SOCIAL INSURANCE 

employer would declare a lockout, leaving the 
worker unemployed. Yet all the evils of unemploy- 
ment might result regardless of the reasons of the 
unemployment. It is the unemployment which 
brings the evil to be provided against, and not the 
causes of the unemployment. The problem of 
finding a method of applying the insurance prin- 
ciple to unemployment is therefore very great. 
While the risks of unemployment in the different 
industries cannot be accurately calculated, yet 
this is not a vital objection if the insurance is 
considered purely on its social basis. All social 
insurance is mutual and involves the distribution 
of a risk that is primarily individual. The effect 
of applying this principle would be to throw upon 
the regular trade the risks of unemployment in 
other trades. It would also probably be neces- 
sary to collect a part of the funds for such insur- 
ance from the employer. 

The difficulty of applying a system of unem- 
ployment insurance in a state a^ a monopoly 
would be very great. Not only would all the 
theoretical objections to such a distortion of the 
insurance principle prevail, but the practical 
difficulties of state boundary lines would exist. 
The states differ very greatly in the character of 

[219] 



INSURANCE AND THE STATE 

their industrial life. Unemployment is much 
more common in some states than in others, and a 
system of unemployment insurance might be a 
haven of refuge for the habitually or even acutely 
unemployed. 

There remains then to summarize the discussion 
of the benefits of social insurance and the obstacles 
to the application of such insurance in the states of 
the United States. In the first place Germany 
affords an example of the effects of a fairly wide 
application of social insurance. It has been in 
operation almost a generation in some of its forms, 
and hence its benefits can more accurately be 
known. Social Insurance is peculiarly character- 
ized by the fact that its effects can only be known 
after a long series of years. Social and economic 
improvement among a people is only shown after 
time has elapsed to alter the character of the indi- 
vidual. In Germany social insurance commands 
the approval of all classes by its results. It has 
produced a powerful effect in the normal and 
material life of the German people and has doubt- 
less had not a little to do in bringing to the Ger- 
mans that reputation which they have for indus- 
trial efficiency. In the second place, a system 
of social insurance makes possible the improve- 

[2201 



SOCIAL INSURANCE 

ment of the conditions of work. This expresses 
itself in the form of protective devices to prevent 
injuries, the invention of methods of reducing the 
loss of life in dangerous trades, the improvement 
in the sanitary and hygienic surroundings of the 
worker in the factory and the home. It tends 
to reduce excessive hours and application for the 
worker. It popularizes scientific knowledge in 
regard to health. It increases the efficiency of 
the worker, not only because it protects his health, 
but also because it increases his length, as well as 
his breadth of life. It relieves him of the worry 
connected with temporary or permanent disability 
and of old-age dependency. Nor are the purely 
moral effects lacking. It is a powerful factor in 
producing a better feeling on the part of the 
worker toward his employer and society. The 
self-respect of the worker is preserved by a realiza- 
tion of the mutual relationship of worker, employer, 
and society. No class is under the system benefit- 
ing from the misfortune of another class, but each 
joins with all others to bear a common burden. 

It has not in Germany produced any burden 
upon the industrial and commerical advance of the 
nation, but has undoubtedly accelerated it. If 
the effects of Social Insurance are then so dis- 

[2211 



INSURANCE AND THE STATE 

tinctively social, the reasons for making it state 
insurance rather than private insurance would 
seem to be strong. It is a state need, and what is 
primarily a matter of public concern should not 
be used as a source of revenue for individuals. 
The particular advantages of the state assum- 
ing the business would be : (1) The state could 
offer an absolute security and certainty which 
would sometimes not be present if it were in the 
hands of private companies. (2) The state could 
secure economies that would not be possible under 
a system of private insurance. These would 
consist in the collection of smaller revenue, in a 
reduction in the agency expense, and in the operat- 
ing or management expenses, and finally in the 
absence of any profits. (3) The state, by assum- 
ing all the business rather than having it trans- 
acted by many private companies, would be able 
to attack the difficult actuarial problems in a sys- 
tem of social insurance, with the result that rates 
for the different kinds of insurance and the differ- 
ent classes of contributing members would be more 
equitable. The statistics could be economically 
and more accurately collected. (4) Under a sys- 
tem of state insurance voluntary organizations for 
this purpose could be preserved and encouraged. 



SOCIAL INSURANCE 

A system of State Social Insurance should be 
devised only to provide minimum insurance, and 
the recipients should be encouraged to use the 
insurance principle to provide by mutual associa- 
tions additional insurance. 

Yet with all these undoubtedly good results 
and promises in prospect under a system of Social 
Insurance by the state it is difficult to apply it in 
the states of the United States. It is easy to 
become so enthusiastic over the excellent social 
results promised in view of the deplorable condi- 
tions existing among the wage-earning classes 
that no sympathy or patience with the objectors 
to its practicability can be felt. The very name at- 
tached to this form of insurance — Social — should 
impress one that it is applicable only to a social 
and industrial unit. Yet our separate states do 
not afford an example of such units. The fact 
that it has received a modified application in some 
states in the form of state industrial accident 
insurance, and that it has placed no evident hard- 
ship on the state nor that unworkable features 
appear in it, is not final evidence of its success. 
Its results can only be told after a series of years. 
The laws have been in operation only a few years 
in the states of the United States. 

[223] 



INSURANCE AND THE STATE 

No system of State Social Insurance should be 
desired which does not leave a wide field of opera- 
tion for voluntary insurance plans among the wage 
earners and between them and their employers. 
Mutual societies should be encouraged, and the 
state should, by a system of established require- 
ments and inspections of such organizations, 
provide for their perpetuity. Some enthusiastic 
social reformers forget that the basic principle of 
social insurance is to provide minimum insurance. 
The development of thrift and individual respon- 
sibility among wage earners is no less a subject for 
state concern than relieving them of these mis- 
fortunes, endured in a large part for the benefit of 
society. But no magic power resides in the imper- 
sonal state. No enduring and efficient society has 
ever existed, except as the individual members 
composing it exemplified social efficiency. Attain- 
ing social, industrial, and intellectual excellence 
is very largely an individual matter. If a method 
can be devised of enacting a federal law for such 
insurance, its good results can scarcely be doubted. 
If such a law were passed, making uniform and 
compulsory provision for industrial accidents and 
sickness, and the states were intrusted with the 
administration of the law, the collection of the 

[224] 



SOCIAL INSURANCE 

funds, and their payments to the beneficiary, 
few of the difficult problems of the system under 
the states would result. Producers would be left 
in the same situation as before the passage of the 
act. There would be no inducement in the law 
for the transfer either of capital or of labor. Each 
competitor would, so far as the provision of the 
law is concerned, remain as strong or as weak a 
competitor as he was before the enactment of 
the law. What was an industrial and social bene- 
fit for the nation would be nationally applied. 
The common welfare would be promoted by this 
general agency for social and industrial efficiency. 
In the absence of such a law the application of the 
principle in view of past experience will be diffi- 
cult. Some states will delay the enactment of 
the principle, and among those which provide the 
insurance great difference in the laws will be 
found. 



225 



INDEX 



Advantages of state social in- 
surance, 222. 

Agency expense, 41-45. 

Anti-coinsurance law, 144-146. 

Anti-compact laws, 122. 

Assets in life and fire insurance, 
93, 94. 

Average loss in fire insurance, 
104-107. 

Civil service and state insurance, 
70-72. 

Classification in fire insurance, 
96, 98, 120, 121. 

Commissions, in fire insurance, 
110; effect of reducing, 125, 
126 ; in life insurance, 42-46. 

Compensation, the, and liability 
principle, 171—173. 

Compensation and liability in- 
surance costs, 202-206. 

Competition and cooperation in 
fire insurance, 149. 

Compulsory fire insurance, 150 ; 
wage-earner's insurance, 183. 

Conflagrations and state insur- 
ance, 91. 

Constitutional obstacles to state 
insurance, 78-80. 

Contract, the fire insurance, 83- 
86. 

Contract nature of insurance, 79. 

Cooperation and insurance, 15. 

Costs, insurance, analyzed, 36- 
58, 193-207; shifting liability 
insurance, 189-198. 

Damages, liability awarded, 180. 
Discrimination in fire insurance, 
147-149. 



Dividends, 40, 41. 

Expenses, fire insurance, 109- 
112; liability insurance, 186. 

Failure of fire insurance com- 
panies, 117-118. 

Fire insurance, nature of, ch. 5. 

Fire insurance and life insurance 
compared, 83-94. 

Fire insurance as a tax, 86. 

Fire loss, the annual, 90, 132, 138. 

Fire marshals, 141-144. 

Growth of insurance, 60-63. 

Indemnity under state insurance, 

74-80. 
Industrial insurance, 162. 
Inspection in fire insurance, 112, 

113. 
Interest rate, 38, 39. 
Investment risk in fire insurance, 

92-94. 
Italian monopoly of insurance, 

15-18. 

Legal status of insurance, 2-4. 
Liability, employer's, in Roman 

law, 167 ; in the United States, 

169-174. 
Liability private companies, 176. 

Methods of increasing the in- 
sured, 35. 

Money, keeping, in the state, 69, 
70. 

Monopoly in insurance, 66, 67, 
114-118, 185-190. 

Mutual relief associations, 174, 
175. 



[227] 



INDEX 



New business, 48. 

Obstacles to state social insur- 
ance, 220-225. 
Old-age insurance, 212-216. 
Operating costs, 46-55. 

Premium receipts, 50. 
Profit and insurance, 9. 
Profit underwriting, 104. 

Rates in fire insurance, 119-132. 
Rating bureaus, 121, 122. 
Rate wars, 124. 
Regulation insurance and state 

insurance, 65-69, 114-118, 

130-132. 
Relief associations, 177. 
Rents, insurance, 56. 
Revenue, state, from insurance, 

31-34. 
Risk, the, in insurance, 5-6, 14. 
Risks, sub-standard, under state 

insurance, 64 ; in life and fire 

insurance, 87, 90. 

Schedule rating, 89-100. 
Sickness, social significance of, 

208-210 ; insurance against, 

211. 
Social aspect of insurance, 7. 
Social insurance, nature of, ch. VI. 



Social purposes of state insur- 
ance, 34-65 ; 132-142. 

State, function of, 7-8. 

State fire insurance as a source 
of revenue, 101-113. 

State insurance, ch. II ; in Italy, 
15-18; in Switzerland, 19; 
in Germany, 20 ; in Wisconsin, 
21-23 ; in Massachusetts, 24- 
25; in Ohio, 26-29; reasons 
for, 30. 

State monopoly of life insur- 
ance, ch. Ill ; of fire insur- 
ance, ch. V; of social insur- 
ance, ch. VII. 

Statistics, of fire insurance, 95 ; 
of liability companies, 179. 

Surplus in fire insurance, 116. 

Taxation of insurance, 3, 12, 109, 
111. 

Unemployment, causes of, 218, 

219. 
Unemployment insurance, 216- 

220. 

Valued policy laws, 142, 143. 

Wage-earner's insurance, how it 
arose, 162-170. 



[228 



'HE following pages contain advertisements of a 
few of the Macmillan books on kindred subjects 



Principles of Insurance 

By W. F. GEPHART 

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A PROGRAM FOR SOCIAL REFORM 

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SEP 5 191? 



